Piper Jaffray Q4 Earnings Call Transcript

123jump.com Staff
03 Feb, 2010
New York City

The asset management services provider quarterly revenue surged 124% to $132.9 million. Net quarterly income was $12.3 million due to strong growth in investment banking and institutional brokerage revenue. The company earned 63 cents a share compared to a loss of $9.76 a share a year-ago quarter.

Piper Jaffray Companies ((PJC))
Q4 2009 Earnings Call Transcript
January 27, 2010 9:00 a.m. ET

Executives

Andrew S. Duff – Chairman of the Board & Chief Executive Officer
Debbra L. Schoneman – Chief Financial Officer

Analysts

Devin Ryan – Sandler O’Neill & Partners, LLP
Daniel Harris - Goldman Sachs
Christopher Nolan - Maxim Group LLC
Steve Stelmach - FBR Capital Markets
Lauren Smith - Keefe Bruyette & Woods

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Piper Jaffray Companies conference call to discuss the financial results for the fourth quarter of 2009. During the question-and-answer session, securities industry professionals may ask questions of management. The company has asked that I remind you statements on this call that are not historical or current facts including statements about beliefs and expectations are forward-looking statements that involve inherent risk and uncertainties.

Factors that could cause actual results to differ materially from those anticipated are identified in the company’s reports on file with the SEC which are available on the company’s website at www.PiperJaffray.com and on the SEC website at www.SEC.gov. As a reminder, today’s conference is being recorded on Wednesday, January 27, 2010. And now, I would like to turn the call over to Mr. Andrew Duff. Mr. Duff, you may begin your call.

Andrew S. Duff

Thank you and good morning. We are pleased to record our best quarterly performance of 2009 and the highest revenues since the fourth quarter of 2007. Also, we demonstrated the value of a balanced business mix.

Our investment banking revenues were significantly higher compared to the third quarter of 2009 which more than offset an expected pull back in our fixed income institutional brokerage revenues.

We are very pleased with our overall performance in 2009. I am going to now measure our key accomplishments for the year.

First, I will start where we ended. In December, we announced the acquisition of Advisory Research which we expect to significantly advance our asset management strategy. When this transaction closes, asset management will represent approximately 25% of our pre-tax income which we expect to mitigate volatility in our capital markets business. Also, it adds sufficient scale and talent to support future organic growth in asset management. We are in target to close this transaction in the first quarter of the year.

Second, we may progress 2009 against our goal of increased return and adjusted tangible equity to 10% to 12% within the next 24 months. For 2009, the return was 4.6%. While we have a substantial way to go, we believe our goal is achievable. In 2010, we intend to make substantial additional progress through four major drivers - continued improvement in investment banking revenues, the addition of Advisory Research, enhanced use of our capital, both for more efficient use in our business and looking for additional opportunities to deploy excess capital into higher margin return businesses similar to Advisory Research. Also, we will be focused on improving productivity, both from existing resources and new hires.

Third, and very importantly, we found the right balance between lowering the cost structure and investing in our business. Despite the tensions between these two objectives we found the appropriate balance. We committed to holding our non-comp expenses to quarterly average of $32 million to $33 million and we met that commitment.

At the same time, we added 59 senior revenue producing professionals across our businesses. Our goal is to have a similar number in 2010. We work to build our platform for future and we are beginning to see those investments reflected in our improved performance.

In that regard, let me make a few comments on each of our businesses. Within fixed income institutional brokerage we achieved strong, profitable results in 2009, a significant turnaround from 2008.

Strategically, we have a great opportunity to significantly increase our penetration after adding 23 new professionals in 2009 within a team of 123. We enhanced our platform by expanding our product breadth with new capabilities and corporate credits, cash flow municipals and mortgages and increasing our distribution capability. Our goal is to add another dozen professionals in 2010.

Within the past year, the trading environment was very attractive and we benefited. Moving forward we intend to increase our client flow revenues which we believe are more sustainable.

Within equities, we have been working to improve the productivity of our US equity business which has increased by 26% since 2007. We will be building on that success in 2010. In addition, we will work to create consistent product, service and distribution in our international markets. Rob Peterson, Head of US Equities has expanded his duties to include Europe and Asia. He will relocate and lead the Global Equities team from London.

We are very encouraged by the momentum in our global investment banking business. We expect to see continued strengthening in the global equity financing markets. In the US, the number of IPOs that were completed in the industry increased in each quarter during 2009.

The US IPO backlog has increased over the past several months. At the end of December, the US backlog was the same level as at the end of 2004, 2005 and 2006. We are seeing improved conditions in Europe and Asia as well.

Within our global investment banking business, we were bookrunner in 33 transactions higher than our average of 26 from 2005 through 2008. We were the sole bookrunner on the best performing US IPO in 2009 (inaudible). In the US, our e-share increased to 4.6 from 3.2 in 2008 for issuers in our focus sectors with less than $2 billion market cap.

Our sector expertise and client focus combined with a broad product set positions us well with our client and I am optimistic about our prospects in 2010.

Finally, we are very pleased with the strong performance in public finance. Our completed power value of senior managed negotiated issues was $9 billion, up 65% compared to 2008 and power value for the industry was up just 4%.

Our economic e-market share rose to 3.5% compared to 2.6% last year for transactions of the power valued less than $500 million. Our market share gains were attributed to penetrative new client relationships and through new geographies and in new sector. In the State of California, our economic e-market share increased significantly to 7%. We averaged 3% from 2004 through 2008.

In 2009, Piper was the top underwriter for school districts in the state by deals and product. We completed 93 financings with power value of $2.6 billion.

As I look at 2010, I am more confident than ever in our platform and our ability to connect capital with opportunity for our clients.

Now, I would like to turn the call over to Debb to review the financial results in more detail.

Debbra L. Schoneman

Thank you, Andrew. In an improving economy and strengthening capital market environment, investments in our businesses and market share gain all contributed to achieving our best quarter of 2009 and improving overall performance for the full year.

In the first quarter of 2009, our net revenues were $133 million and we generated net income from continuing operations of $12.3 million or $0.63 per diluted common share. Our pre-tax operating margin was 14.3% which was our best quarterly performance for the year.

Revenues for the full-year 2009 were $469 million just 7% below our peak in 2006. For the full year, we achieved a pre-tax operating margin of 12.1%, our best since becoming a public company in 2004.

Now, to provide more detail on our fourth quarter revenue. Investment banking contributed 55% of revenues in the quarter which is near our average of 58% from 2004 through 2007.

Equity financing activity was broad and revenues were $36.5 million, the highest level since the fourth quarter of 2007. All the other seasonal products, particularly register direct contributed to the performance. Our current backlog of US public offerings is 13 transactions which is up from seven when we reported our third quarter result.

Public finance deals were $26 million, the second highest ever. We completed 147 public finance transactions with the power value of $3 billion. Insurance activity remained very well for high yield, real estate and development finance – sectors which have historically but meaningfully contributed to our business. We expect only a modest recovery in these sectors in 2010.

Also public finance growth may be negatively impacted by budget pressures in the public sector although we certainly have vast experience in this.

Financial advisory revenues were $11 million, up slightly compared to the year-ago period and the sequential quarter. We are in fact improving trends in Middle Market M&A over the course of 2010 which should translate into improved performance for our business.

Turning to the institutional side of trading we generated net revenues of $50 million, a substantial improvement from last year and down 21% from the strong third quarter of 2009.

Within institutional brokerage, equity’s revenues were $28 million, essentially the same as last year and down 11% compared to the third quarter of 2009. Global US high touch revenues were the main contributors to the decline compared to the sequential third quarter. Lower volumes and lower commissions per share drove the decrease.

Fixed income institutional brokerage revenues were $22 million, a substantial turnaround from the same quarter last year. Compared to the strong third quarter of 2009, revenues decreased 31% mainly reflecting lower secondary municipal revenues and fewer municipal strategic trading opportunities. Secondary revenues were lower because the market was absorbing a lot of attractively priced new issues.

Now, I’ll turn to non-interest expenses which I’ll address from a full-year perspective. For 2009, our compensation and benefits expense was $281 million. Revenues increased by 44% yet compensation expense increased just 13% yielding a compensation ratio of 60% which we held throughout the year.

For 2009, non-compensation expenses were $131 million or 28% of revenue. For 2010, we expect that the actual amount of non-compensation expenses will increase triggered by the addition of Advisory Research, increased business activity and new hires. However, we intend to improve upon the ratio of non-compensation expenses through revenue that we achieved in 2009

This concludes our remarks and I’ll turn the call back to Andrew.

Andrew S. Duff

That concludes our formal remarks. Operator, we will now open the line for questions.

Question-and-Answer Session

Absolutely, sir. Securities industry professionals may register to ask a question by pressing the “1” followed by the “4” on their telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, press the “1” followed by the “3”. If you are using a speakerphone, please lift your handset before entering your request. Once again, press the “1” followed by the “4”.

And our first question comes from the line of Devin Ryan of Sandler O’Neill. Please proceed with your question.

Devin Ryan - Sandler O''Neill & Partners, LLP

Good morning. On the fixed income sales and trading side, can you give some more color just for your expectations going forward relative to what we saw this quarter? I''m just trying to get a sense of whether this quarter represented a normalized quarter or would things pick up as activity levels rebound. I''m just trying to get a sense of how to think about that going forward from what we had this quarter.

Debbra L. Schoneman

I would say that overall throughout 2009 we saw a strong performance in the fixed income market which really enabled us to leverage our knowledge especially of municipal markets and the advantage of -- on strategic training opportunities as well as just activity with our clients. I think overall we don’t believe those same market opportunities will exist to the same extent in 2009.

Andrew S. Duff

I would just add to that. We are enforcing some of Debb’s comments about the trading environment being very capable. Having said that, we continue to invest throughout the year in product right for distribution and where we had earlier, last year had commented on the $65 million to $75 million revenue rate we think we are in track now for a $100 million in a sustainable way.

Devin Ryan - Sandler O''Neill & Partners, LLP

Got it, okay, that''s helpful. Then just on the debt underwriting side, you highlighted public finance. It sounds like you''re making some real market share gains there. Can you just clarify the comments that you made about your expectations for that market heading into 2010? It sounded like you noted a couple of headwinds potentially for that market.

Debbra L. Schoneman

Yes, I think, first of all, we don’t anticipate a very large significant pick up in some of the sectors that have not been performing as I mentioned. I think although we are not seeing it yet, we just are aware of the budget concerns out there and some of the pressure that it may put on the market so we are just -- . I think overall the pressure is somewhat ignored.

Andrew S. Duff

Actually, the business is performing very well and we do have an expanded geography in sector expertise so we will do reasonably well.

Devin Ryan - Sandler O''Neill & Partners, LLP

Okay, great. Then just on that asset management business, fees look like they increased 36% from last quarter, even though AUM is only up 3%. Is there anything seasonal happening there, or is it something else?

Debbra L. Schoneman

Well, as you had mentioned we had a market appreciation that did increase the AUM. In addition, there was a performance fee earned in our MLP product. This is the first quarter in which that has been achieved. In addition, we had some additional revenues from our private equity business that probably increased in the quarter.

Devin Ryan - Sandler O''Neill & Partners, LLP

Got it. Could we expect performance fees going forward, or is that kind of a one-time thing?

Debbra L. Schoneman

There is a potential for those fees going forward depending on the performance of that MLP product.

Devin Ryan - Sandler O''Neill & Partners, LLP

Okay, great. Then just lastly on the expense side, the $1.4 million of expense related to the Advisory Research, where is that showing up? Is that in the Other?

Debbra L. Schoneman

That is primarily in the -- okay, services.

Devin Ryan - Sandler O''Neill & Partners, LLP

Okay, great. Thanks a lot for taking my questions.

Operator

Thank you for your question. Continuing on, our next question comes from the line of Daniel Harris from Goldman Sachs. Please proceed with your question.

Daniel Harris - Goldman Sachs

Good morning, guys. How are you? So you talked about a lot of hiring across a few of the business units, and I think you put out a press release earlier indicating that you would be looking to hire a lot of investment bankers. Where are you in the process versus the press release you guys put out earlier? In terms of, you know, if you think about where the people you hired throughout the year are in terms of ramping up, how would you characterize that?

Andrew S. Duff

We are in the early days a little bit so we quantitatively hired approximately 60 in 2009 and intend to do a similar amount in 2010. It is our intention to try and do that in the front part of the year. It’s a natural time in which people might consider transition in the beginning quarter of the year. So we are engaged in those conversations. We already have some commitments but I guess it is fair to characterize at the end of (inaudible) stages.

Daniel Harris - Goldman Sachs

Okay, so that sounds pretty positive for the pace of Investment Banking for next year. As I think about actually another line item on the equity side, just surprising how solid in terms of the stability of that line is throughout the course of the year, I mean $28 million to $30 million every quarter. Is that sort of how we should think about a run rate? I know you can''t predict volumes or the market, but is there anything different that I should be thinking about in terms of at least the way that number changes throughout the course of the year in 2010?

Debbra L. Schoneman

Which number are you talking about?

Daniel Harris - Goldman Sachs

Just equity sales and trading, it was 30-30-31-28, I mean just barely stable versus --

Debbra L. Schoneman

You are correct. It has been quite stable. I think over time if there has been pressure on what we would call that high touch business we have been able to offset that by traditional products and I think the -- such a convertible minimum touch trading.

In addition, we are really seeing an expansion potentially internationally there as well. It’s really better not to -- almost a slight remix in that business over the US business so that remains a significant portion of that line item.

Daniel Harris - Goldman Sachs

Okay, perfect. Then lastly for me, you guys did a really good job this year on sort of nailing the comp and benefits to your target. How do we think about that going forward? Historically, you were lower in prior years; the high 50s% versus you know just about 60% this year. Is there room for that to move lower as we think about 2010?

Debbra L. Schoneman

Definitely because it is the first time we hit historical numbers. Really the correct way to look at that is on a fully dictated basis so that you are looking at accounting in the same way that we are doing that now and in that case the numbers are actually higher than 60% historically. As I also mentioned in my comments we are looking at similar comp rates of 2009.

I think we have got some benefits that we can realize from Advisory Research but offset by additional recruiting and in some of them it’s real significant impact from the UK payroll tax. So net-net we are not anticipating a lot of change in that number.

Daniel Harris - Goldman Sachs

Okay, thanks a lot. Great quarter.

Operator

Thanks you for your question, sir. Continuing on, our next question comes from Christopher Nolan from Maxim Group. Please go ahead, your line is open.

Christopher Nolan - Maxim Group LLC

Hi, thanks for taking my call. Should we anticipate in the first quarter a similar merger-related charge as we saw in the fourth quarter for Advisory Research?

Debbra L. Schoneman

No, Chris, almost all those charges were taken in the fourth quarter. We may have a small amount that will be less than $500,000.

Christopher Nolan - Maxim Group LLC

Great. Going forward, on the Asset Under Management growth for FAMCO, following Advisory Research closely, should we sort of start looking at a more rapid asset growth for FAMCO, given that you''re working from a bigger platform now?

Andrew S. Duff

I think it will take a little bit of time to achieve the available synergies from a marketing perspective for the two organizations. Over time, we do think this repositions us and a strengthened position to grow. I think more realistically it can take a while for two organizations to get to know each other and work through some of those opportunities.

Christopher Nolan - Maxim Group LLC

Great. Finally, on the municipal financings being driven by the taxable product, is that part of your strategy in terms of your comments of expanding your presence overseas in order to market those products to an international client base?

Andrew S. Duff

We are looking to get some distribution out of the ones in office for the taxable municipal products.

Christopher Nolan - Maxim Group LLC

Great. Thanks so much for taking my call.

Operator

Thank you, Mr. Nolan. Continuing on, our next question comes from the line of Steve Stelmach of FBR Capital Markets. Please proceed with your question.

Steve Stelmach - FBR Capital Markets

Hi, good morning. Congrats on a good quarter, guys. A question on, Andrew, some of your comments regarding uses of capital -- you mentioned you may be interested in other potential acquisitions being akin to Advisory Research. Is the strategy -- is that comment based on ROE or based on asset managers? Do you understand the content of the question?

Andrew S. Duff

It’s the latter. It is more about ROE. We are looking for higher margin, higher ROE businesses, advisory businesses, industry sectors - potentially public finance, expansion. We don’t intend to prioritize asset management from a corporate development perspective. I think we now have got a platform that is well situated for organic growth.

Steve Stelmach - FBR Capital Markets

Got it, okay, that''s helpful. Then just lastly, on China, it looks like you guys have made some pretty significant progress there, and that acquisition has panned out pretty well, at least through 2009. Expectations for 2010 -- does it seem pretty similar to you, that market, or is it improving, from your perspective?

Andrew S. Duff

It is improving. Frankly, you can see it in the backlog. We have got both China-based and companies going public in the US and Hong Kong-based companies going public in Hong Kong. In our backlog that Debb referred of 13, we have 60 in the pipeline in Hong Kong.

Steve Stelmach - FBR Capital Markets

Yes.

Andrew S. Duff

The economics is totally different from where the listing is for US, whether it is US or whether it is Hong Kong.

Debbra L. Schoneman

There is some differential there where the economics are higher in the US than in Hong Kong.

Steve Stelmach - FBR Capital Markets

What kind of the degree of magnitude should we be thinking about?

Debbra L. Schoneman

I don’t know if I could put it. I wouldn’t say significant but there is definitely a difference that we have seen.

Steve Stelmach - FBR Capital Markets

All right. Well, guys, thanks and congrats on a good quarter.

Operator

Thank you, sir. Before we move on to the next question, once again, securities industry professionals may register by pressing the “1” followed by the “4” to ask a question. And our next question comes from Lauren Smith from KBW. Please proceed with your question.

Lauren Smith - Keefe Bruyette & Woods

Good morning. I guess we''ve covered most everything, but I guess just two remaining for me -- with respect to your share repurchase, what was the average price during the quarter?

Debbra L. Schoneman

Well Lauren, I actually don’t have that available.

Lauren Smith - Keefe Bruyette & Woods

Or the aggregate amount? I know it was 347,000 some-odd shares due. We can follow up; I was just curious.

Debbra L. Schoneman

Lauren Smith - Keefe Bruyette & Woods

With respect to the hiring environment, you know, you guys still have aspirations to significantly expand, so I am just curious what you are seeing, hearing in the market. Have negotiations gotten a little tougher? Are expectations changing? I guess just Andrew your views overall now that bonus of the big firms are getting paid and there''s probably a lot of disappointment. Do you think we are going to see another sort of wave of defections?

Andrew S. Duff

My perspective on that one would be it definitely is -- the market is tightening. I guess it is the way I see it most directly and most of our firm is looking to expand. I also observe that this has been throughout 2009 and will carry forward. There is a lot more attention paid it seems to us to the type of platform, the culture, the compensation philosophy, and it yields like a much longer term yield that candidates take towards making a decision. We think we can stand up very competitively in that kind of perspective, not just where can I get a guarantee for a year or two but where is this platform going, how do I fit, what kind of impact do I have to it, all those I think we can be well positioned to let down.

Debbra L. Schoneman

Lauren, we also have the answer to your other question, it was about $45.75 was the average price.

Lauren Smith - Keefe Bruyette & Woods

$45.75.

Andrew S. Duff

Although aggregate amount of --

Debbra L. Schoneman

$15.9 million.

Lauren Smith - Keefe Bruyette & Woods

Great. Thanks, guys, very much. I appreciate it.

Operator

Thank you and we now have a follow-up question from Devin Ryan from Sandler O''Neill. Please proceed with your question.

Devin Ryan – Sandler O’Neill & Partners, LLP

Sorry if I missed this, but what was the other revenue in the quarter? There was $4 million in Other revenue?

Debbra L. Schoneman

There is a couple of items in there, one is increased valuation and revenues from our merchant banking and other firm investment. In addition, we have some equity amortization recapture on (inaudible).

Devin Ryan – Sandler O’Neill & Partners, LLP

Okay. All right. Thank you.

Operator

Thank you. That appears to be the final question from our audience. Mr. Duff, I will turn it back to you to continue for concluding remarks.

Andrew S. Duff

Thanks a lot, operator. In closing I would just like to say that we are proud of what we’ve accomplished in 2009 and I am very confident of our prospects in 2010. I would like to thank our employees for the hard work. 2009 was definitely improvement, in many ways it was not easy. And I want to thank our clients for placing their trust and working with them on their behalf. Thank you for joining us this morning.

Operator

Thank you, Mr. Duff. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect. Thank you once again and have a fantastic day.