Cowen Inc (COWN) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for joining the Cowen Group Inc. conference call to discuss the financial results for the third quarter of 2007. By now you should have received a copy of the Company's earnings release which can be accessed at the Cowen Group Inc. website at www.Cowen.com. If you do not have Internet access and would like a copy of the press release, please call [Lon Lee] at 646-562-1846.

Before we begin the Company has asked me to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to risks and uncertainties described in the Company's earnings release and other filings with the SEC. Cowen Group Inc. has no obligations to update the information presented on the call. A more complete description of these and other risks, uncertainties and assumptions is included in the Company's filings with the SEC which are available on the Company's website and on SEC website at www.SEC.gov.

Also on today's call our speakers will reference certain non-GAAP financial measures which the Company believes will provide useful information for investors. Reconciliation of these measures to GAAP is consistent with the Company's reconciliation as presented in today's earnings release. Now I would like to turn the call over to Mr. Kim Fennebresque, Chairman and Chief Executive Officer, who is joined today by Mr. Tom Conner, Chief Financial Officer.

Good morning and thank you for joining our conference call. I'm going to start this morning with our results for the quarter and then spend some time discussing the market turmoil in the third quarter and its impact on our business. I'll also comment on our performance for the first three quarters of the year and then turn the call over to Tom who will review the financial information for the quarter in greater detail.

For the third quarter of 2007 revenue decreased in the third quarter of 2006 by $2.7 million to $57.5 million on weaker investment banking results, primarily due to difficult capital markets conditions. We recorded a net loss of $3.3 million for the period compared to a net loss of $11.4 million in the third quarter of 2006. In our current configuration our results are highly correlated to the market activity of our target growth sectors.

A little over a year ago we became an independent public Company focused on growth companies and institutional investors in the healthcare, technology and consumer sectors of the economy. Since that time we have been working to strengthen both our existing platform by adding three new sectors and to diversify our revenue base by expanding into complementary businesses such as asset management. Despite steady progress in both these areas we remain subject to a relatively high beta. In the fourth quarter of last year we benefited from our correlation to our growth sectors while this year we have largely suffered as a result of that beta.

When the subprime market collapsed we were not directly impacted by a fall out in the credit markets, we had no loans on our books to write down, no home commitments not any exposure to the housing market. The credit market turmoil did however spillover into the equity markets leading to increase volatility. Our sales and trading group to took advantage of this opportunity as revenues increased 4% sequentially and year-over-year. I'm pleased with the consistently strong performance of our sales and trading group while maintaining our risk standards. Our banking business has been a disappointment with revenues down 52% sequentially and 21% year-over-year.

While the preponderance of our banking results may be attributable to the market, I must acknowledge that we were also impacted by the significant changes at Cowen over the past year. The most dramatic change of course was our becoming an independent public company. And while this independence has provided opportunities for future growth, it did cause disruption as some employees chose not to be part of this new structure.

In addition, as I've noted on many occasions, I've insisted that our banking department improve its performance in M&A. For some bankers this was not consistent with their skill set and consequently a number of them chose to pursue other options; in some cases these departures have cost us revenues. Further, while we've made significant additions to the department in the past six months, some of whom are leaders of new industry sectors, it takes time for new people to produce on a new platform.

While we do not provide forecasts I believe that our third-quarter banking performance warrants a more fulsome discussion of our current backlog. I'm pleased to report that we have already completed more capital raising transactions in the fourth quarter than in the entire third quarter. We have completed three pipes with three currently in the market. We have completed seven IPOs and we have 17 filed equity offerings with nine as lead manager.

Our filed and unfiled public equity backlog is the highest it has been all year and, importantly, it is greater than it was at this time last year. Our M&A backlog is up by more than 45% compared to this time a year ago and we are on track to increase our M&A revenues by 50% over last year. While not yet where it needs to be our M&A business has improved substantially and that trend will continue.

I'm now going to spend a minute on our growth strategy. I have said from our earliest days that our growth will be based on expanding our platform organically and by acquisition. As I said, we have added three new sectors and entered both the traditional and alternative asset management businesses. Our asset management team in London is officially open for business and we will announce the launch of our U.S. effort in the coming weeks. Both these traditional long only teams will take time before they make meaningful financial contributions. They are structured so that all parties will prosper when the business grows, but will not unduly burden us in the interim.

Our alternative asset management team, Cowen Healthcare Royalty Partners, should contribute next year and in the interim is virtually self funding. Our new sectors have already produced financial results and I expect that contribution to grow in 2008. In sum I am pleased with the steps that we have taken.

As for acquisitions, we have looked at many and come close on a few. Indeed we continue to look at and are in early discussions with some. For the past year I have felt that the market for the types of assets that we wanted was high. As much as I know our shareholders wanted to see action, we will not acquire merely to add revenues, we will only acquire when we think we can add quality earnings at a reasonable price.

Regarding our compensation accrual, as we have stated in the past, our target compensation to revenue ratio has been 58 to 60% as we have sought to maintain that ratio at the lower end of the range. This quarter we elected to accrue compensation expense for the nine-month period at 60% and will do so for the fourth quarter as well. This was a very difficult decision because of the obvious implications for our bottom-line. While we understand that 2007 compensation will not be at the same level as that of 2006, I believe that it is in the best interest of Cowen and its shareholders to take commercially reasonable measures to compensate our personnel as competitively as possible.

I'd now like to turn the call over to Tom Conner to review the financial results in more detail. Once Tom has completed his review I'll offer some closing remarks before we take your questions.

Thank you, Kim. So the third-quarter 2007 total revenue was $57.5 million representing a decrease of 4% from $60.2 million during the same quarter of 2006. Investment banking revenue for the third quarter was $14.4 million, a decrease of $3.9 million compared to the same period in 2006. The decrease primarily reflects a reduction in our private capital raising activities partially offset by an increase in our public capital raising activities and strategic advisory fees.

Revenue from sales and trading for the third quarter was $38.9 million compared to $37.5 million in the third quarter of 2006. The increase primarily resulted from additional revenues related to our options activities, securities owned and higher over the counter equity volumes partially offset by a decrease in convertible trading revenues.

Interest and dividend income for the third quarter was $2 million compared to $2.9 million in the same period last year. The decrease of $0.9 million resulted from lower average interest-bearing assets in the third quarter of 2007 compared to the third quarter of 2006. The reduction in interest earning assets was primarily the result of a return of capital to SG in connection with our IPO.

Turning to expenses, our compensation and benefits expense was $37.8 million in the third quarter compared to $45 million in the third quarter of 2006. The decrease was primarily related to the following three items. First, the third quarter of 2006 included the accelerated vesting expense of $7.5 million related to deferred compensation plans which were terminated as a result of our separation from SG.

Second, the expense associated with our initial grant of equity to our employees in connection with the IPO was $0.4 million for the third quarter as compared to $2.6 million during the third quarter of 2006. This decrease was a result of a $1.9 million cumulative catch-up adjustment related to a change in estimated forfeitures.

Lastly, these decreases were partially offset by an increase of $4 million in the third quarter of 2007 to bring the compensation of revenue ratio from 58% to 60% for the nine months ended September 30, 2007.

Excluding the compensation expense associated with initial grant of equity and the terminated compensation plan, employee compensation and benefits expense as a percentage of total revenue was 60% and 58% for the nine months ended September 30, 2007 and 2006, respectively. Non-compensation expenses for the quarter were $25.5 million compared to $27.3 million during the same quarter last year.

The decrease was primarily attributable to a decrease in floor brokerage and trade execution related expenses as a result of our new clearing agreement and a decrease in marketing and business development expenses. These decreases were partially offset by an increase in service fees and an increase in other expenses primarily resulting from legal expenses related to terminated transactions. We expect our non-compensation expenses to increase slightly during the last quarter of the year; however we believe we will reduce our total non-compensation expenses by approximately $6 million to $7 million compared to 2006.

For the third quarter of 2007 we recorded a tax benefit of $2.5 million which reflects an effective tax rate of 43% compared to a tax benefit of $0.7 million in the third quarter of 2006 which reflects an effective tax rate of 5.4%. For the third quarter we recorded a net loss of $3.3 million compared to a net loss of $11.4 million in the third quarter of 2006.

Excluding the compensation expense associated with initial grant of equity to our employees in connection with the IPO and the deferred compensation expense in the third quarter of 2006 related to SG plans that were terminated at the IPO our adjusted operating loss for the quarter was $5.4 million compared to $2.0 million in the corresponding period of 2006.

Loss per share for the third quarter was $0.26. Tangible book value per share at the end of the period based on total common shares outstanding was $11.25. I would now like to turn the call back over to Kim for closing remarks before we take your questions.

Thanks, Tom. Clearly our investment banking performance has been a disappointment. Much of that is attributable to the market, but some of that is attributable to us and addressing the "us" was our responsibility and we've done that. In my view our current team of senior producers is as strong as it has ever been and our backlog has begun to reflect that. Meanwhile our sales and trading team, including our research department, continues to be the best among our peers. This concludes our formal remarks and Tom and I are happy to take your questions.

(OPERATOR INSTRUCTIONS). Jeff Harte, Sandler O'Neill.

Good morning, guys. Kim, when you talk about disappointing investment banking performance as I kind of look at the comps here, private equity and I suppose the pipes business really seems to be where things aren't quite up to where they were last year. I don't know that the industry statistics suggest it's quite that bad. Can you talk a little bit about kind of what's been going on there kind of the first three months of the year? And I suppose the outlook is looking better because you've got deals closing already, but what kind of happened the first three quarters of 2007?

I think the first quarter of '06, if memory serves me, was really a bumper quarter and then the second and third last year both slowed down. And last year we had a spectacular fourth quarter. I think it's nothing more than -- I don't think we've had any material diminution in marketshare, I just think there's been less business going around.

Have any of the -- you've mentioned some employees leaving; has that had a material impact on the private equity business say relative to the public equity business?

I think it's probably -- on a relative basis I would say no. I think the loss of people has affected our business across the board I think. And in the pipes business and private equity business no more than anyplace else because the pipes business hasn't become and is an institutional business not necessarily driven by the private equity group, although obviously they are critical to it. But it's really driven by the number of bankers and we did lose a number of bankers in some areas where pipes were a part of their product suite.

Okay. And in the press release on the commission trading side you guys referenced that commission from options was up. The fact that you're mentioning it in the press release, does that mean it's becoming a more material contributor to revenues in the commission line, the options business?

It's becoming material enough that we feel it's important to mention it. Obviously our core institutional business is the key there. But as we've said over the past few quarters, we're trying to add products that we were not able to do before to help sustain the sales and trading effort.

To further that, Jeff, I think obviously the options business was of greater significance in the highly volatile end of summer months that we saw. But we got into the options business about 15 months ago and it was not nearly as successful as we thought it would be and we made changes to it. And it is not going to be the business we hoped it would be a year and a half ago. We now have the group sized properly and think it is and will continue to be a very nice contributor to our business, just not a bottom-line changer of any magnitude.

Okay. And finally, on the comp ratio going up to 60% or at the top end of the range it sounds like for 2007 -- has that been more a function of you've been hiring a lot of people or is that more of a function of having to remain competitive with your existing employees?

I would say the hiring we have done has not added material to our comp pool because, as I said, we have lost some people. So the net effect is probably neutral. I think the reality is that with revenues down is when you have to take your comp up because you want to concentrate people competitively. So the increase in the comp ratio I would say is 90% attributable to the need to have more comp to pay our current teams.

Okay, thank you.

(OPERATOR INSTRUCTIONS). It appears we have no more audio questions in queue at this time.

Thank you all very much for joining our call. Appreciate your help. Bye.

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect and have a good day.