Penson Worldwide (NASDAQ: PNSN), a leading provider of execution, clearing, settlement, custody and technology products and services to the global financial services industry, today announced results for the fourth quarter and year ended December 31, 2008.
Fourth Quarter 2008 GAAP Results
Year over year, total net revenues for the quarter decreased 9%, to $69.1 million, reflecting lower net interest revenue, despite higher non-interest revenue. Non-interest revenue grew 6%, to $55.6 million from $52.3 million, primarily due to increased clearing and commission fees (+5%) and technology revenue (+34%). Net interest revenue declined 42%, to $13.5 million from $23.2 million, due to a 77% drop in the average federal funds rate, lower conduit stock borrowing, and weak credit markets. Operating expenses included a $25.3 million write off of a previously announced unsecured receivable from Evergreen Capital Partners, Inc., a former correspondent, and $1.1 million in related legal and professional expenses. On a net after tax basis, these items negatively affected results by $17.4 million, or $0.69 per share, resulting in a fourth quarter net loss of $10.8 million, or $0.43 per share, compared to net income of $10.2 million, or $0.39 per diluted share, in the December 2007 quarter.
Fourth Quarter 2008 Pro Forma Results
Excluding Evergreen, the Company had pro forma operating income of $8.5 million, net income of $6.6 million, and earnings per diluted share of $0.26. Results included a reduction of $2.9 million in net revenues and $0.02 in earnings per diluted share, net of tax, primarily due to the significant depreciation of the Canadian dollar against the US dollar from the third to the fourth quarter; and a $1.3 million benefit, equal to $0.05 per diluted share pro forma, due primarily to international tax credits, which lowered the effective tax rate to 22.3% pro forma from 38%.
"While we are not pleased with our GAAP results, Penson did generate solid profits during the fourth quarter on a pro-forma basis, in an extremely challenging operating environment," commented Philip A. Pendergraft, Chief Executive Officer. "On a sequential basis, the 13% decline in net revenues was largely driven by external market forces. In addition to the Canadian dollar, these factors included the significant reduction in the federal funds rate, weaker than usual year-end trading activity, and continued slowness in securities lending."
"Since December, however, trading activity has begun to improve and customer interest-earning balances have remained stable. While we have not yet felt the full impact of the last interest rate cut, we believe that we will be able to largely offset it by moving some interest-earning assets from overnight investments into federally-insured bank accounts. This should increase yields without an increase in duration or counterparty risk, mitigate further spread declines, and may result in modest increases in net interest revenue in the quarters ahead. We are also continuing to attract new business, and will be launching new initiatives in 2009 to further expand our product and service offerings and geographic reach."
"While in the short-term we are generally affected by industry volumes and interest rates, longer-term we will continue to benefit from the increasingly technology-centric nature of the global markets and from the growing validation of our independent, non-conflicted specialist model as compared to our larger competitors in today's very challenging financial environment."
Analysis of Fourth Quarter 2008 Results
(All comparisons are to the corresponding year-ago period unless otherwise indicated)
Revenue from clearing and commission fees increased 5%, to $36.5 million, reflecting stronger market volumes early in the quarter and continued growth in new correspondents. Technology revenue increased 34%, to $6.1 million, due to continued high levels of recurring business, as correspondents expanded their client base and volumes, and the recognition of $1 million in licensing revenue from a previously announced contract. In the "other" category, revenue declined 1%, to $13.0 million, which included continued growth of Penson's trade aggregation business.
Net interest revenue from correspondent customer interest earning asset-based balances declined 45%, to $11.7 million, as the year over year decline in the average federal funds rate, to 106 bps from 452 bps, was partially offset by a 6% increase, to $4.30 billion, in interest earning average daily balances. Net interest revenue from conduit stock loans declined 8%, to $1.8 million, as the 46% year over year decline in average daily borrows, to $773.7 million, was partially offset by a 65% increase in spread, to 89 bps from 54 bps.
Foreign Currency Translation
The significant fourth quarter 2008 depreciation of the Canadian dollar and, to a lesser extent, the British pound negatively impacted net revenues on a year over year basis by $4.1 million, consisting of $2.8 million in clearing and commission fees, $840 thousand in other revenue, and $472 thousand in net interest revenue. On a sequential quarter basis, this negatively impacted net revenues by $2.9 million, consisting of $2.0 million in clearing and commission fees, $604 thousand in other revenue, and $330 thousand in net interest revenue.
Penson continued to expand its customer base, adding two net new revenue generating correspondents in the December 2008 quarter, for a total of 302, up 9% from 277 in the December 2007 quarter. Securities clearing operations in the US, Canada and UK added one net new correspondent in the fourth quarter, for a total of 259 as compared to 243 in the year ago quarter. The Penson GHCO futures operations added one net new introducing brokerage firm in the fourth quarter, for a total of 43, as compared to 34 in the year ago quarter. Not reflected in the above numbers is a "pipeline" of 23 new correspondents that are expected to begin contributing to revenue in the first half of 2009.
Balance Sheet Highlights
Balance sheet assets of $5.58 billion at December 31, 2008 declined 29% from $7.85 billion a year ago and 25% from $7.45 billion at September 30, 2008, reflecting declines in securities lending balances, as well as a lower balance of unsettled transactions at December 31 versus September 30. End customer segregated funds, consisting of cash and short-term securities, of $2.38 billion at December 31, 2008, increased 5% sequentially and 66% year over year. Total stockholders' equity of $264.5 million was virtually level with a year ago and down 6% from $280.6 million at September 30, 2008.
Interest Rate Sensitivity
Based on the size and composition of Penson's customer interest-earning and interest-paying balances as of December 31, 2008, the Company estimates that a 25 basis point change, up or down, in the targeted federal funds rate would increase or decrease net interest revenue by approximately $750 thousand per quarter, respectively. This estimate excludes the expected positive impact from the shift of funds into higher-yielding, federally-insured, short-term bank accounts, as mentioned above.
For the year ended December 31, 2008, net revenue increased 11%, to $293.2 million, with non-interest revenue up 24%, to $218.1 million, and net interest revenue down 15%, to $75.1 million, as compared to 2007. Net income was $10.7 million, or $0.42 per diluted share, in 2008, as compared to $26.8 million, or $1.00 per diluted share, in 2007. Pro-forma net income for 2008 (which excludes expenses related to SAMCO litigation in the third quarter and Evergreen in the fourth quarter) amounted to $29.5 million, or $1.16 per diluted share.
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