Cowen Inc (COWN) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for joining the Cowen Group Incorporated conference call to discuss the financial results for the first half of 2008.

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 [Nicole Killa] at 646-562-1796.

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 main contain forward looking statements. These statements are subject to the risks and uncertainties described in the Company's earnings release and other filings with the SEC.

Cowen Group Inc, has no obligation to update the information presented on the call. A more complete description of these and other risks, uncertainties, and assumptions is included with the Company's filings with the SEC, which are available on the Company's website and on the 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'd like to turn the call over to Mr. Greg Malcolm, Chief Executive Officer who is joined today by Mr. Tom Conner, Chief Financial Officer. Please, proceed.

Good morning and thanks for joining our conference call. I'm going to start today with our results for the second quarter and for the first half of 2008 and then spend a few moments discussing each of our business areas.

I'll then turn the call over to Tom, who will review the financial information for the quarter and the half in greater detail. Then we'll take your questions.

For the second quarter of 2008, revenue was $62.7 million, a decrease of $8.5 million from the second quarter of '07 and an increase of $7.7 million from the first quarter of '08.

It should come as no surprise that the year over year decrease was due primarily to a reduction in revenue from capital raising transactions. The quarter over quarter increase was due to improvements in both capital raising and strategic advisory revenue.

We reported an adjusted net operating loss of $300,000 for the second quarter, which represented a $2 million decrease from adjusted net operating income of $1.7 million in the second quarter of '07 and an improvement of $300,000 from the first quarter.

On a GAAP basis, we recorded a net loss of $700,000 for the period, a $900,000 decrease from net income of $200,000 from the second quarter of '07 and a $1.4 million decrease from the first quarter. Our GAAP results, as you may recall, for the first quarter included a $5.1 million reversal of stock compensation expense.

For the first half of 2008, revenue was $117.7 million, a decrease of $27.1 million from the prior year period. The year over year decrease was, again, due primarily to a reduction in revenue from capital raising transactions as well as a reduction in revenue attributable to the firm's warrant positions.

As an aside, the firm receives warrants in connection with pipes and private placements. This warrant portfolio is mark to market every month and those marks resulted in gains in the first half of '07, compared to losses from marks in the first half of '08.

During the first half of '08, the firm recognized $1.1 million in losses on its warrant positions and the first half of '07 - excuse me - the Company recognized $6.5 million in gains as a result of the successful IPO of certain companies in the portfolio and the overall market appreciation throughout the period.

Now, returning to the first half, we reported an adjusted net operating loss of $1.7 million, down $6.2 million from adjusted net operating income of $4.5 million in the prior period. On a GAAP basis, we reported a net loss of $100,000 for the period, down $2.8 million from net income of $2.7 million.

During the first half, our performance was obviously impacted by the lack of equity capital markets activity, both industry wide and in Cowen's target sectors. Underwriting revenue was $5.8 million for the first half, a decrease of $22.7 million from the prior period. Though underwriting revenue of $4.3 million in the second quarter increased $2.8 million sequentially.

The growth sector equity new issue market is an important part of our business and as a result, depressed capital raising activity has a significant impact on our overall results. During the first half of 2008, only 10 growth sector IPOs priced down 85% compared to 65% in the prior year period. Similarly, growth sector follow-on offerings during the first half have climbed 64% to 38 transactions compared to 106 in the prior year period.

As an aside, if I look back over the post-bubble period of the past five years, the $1.5 million of underwriting revenue in the first quarter of 2008 was the worst quarter since the first quarter of 2003 when we had a - when we had $1.4 million of underwriting revenue.

I would note that our best underwriting quarter during that period was $31.5 million. These swings give you a clear indication of the cyclical nature of this part of our business. However, our public equity backlog remains strong with 14 file transactions of which five were book run or lead managed. Like our peers, we look forward to improved market conditions, however, I'm not confident that the market window will open this quarter or next.

On a more positive note, our strategic advisory revenue for the first half of 2008 increased 50%, year over year, to $24.5 million. Since our IPO, we have taken significant steps to strengthen our advisory practice and our first half results illustrate the progress we have made.

We were particularly pleased with this performance in the face of a 10% decrease from first half of growth sector M&A activity as measured by deal value and a 13% decrease as measured by the number of transactions completed. Entering the third quarter, our M&A pipeline was robust, having increased 24% from the end of the first quarter.

Core brokerage revenue for the six months was flat, compared to the prior year period. Overall brokerage revenue in the first half decreased $8.6 million, compared to the first half of '07. The decrease was primarily related to the mark to market adjustments in the firm's warrant positions which I described earlier.

Historically, we have out punched our weight in the cash equity business due to the caliber of our research and sales and trading professionals, as well as a very disciplined asset allocation loan. We continue to take steps that we believe will allow us to maintain this superior performance. As an example, we expanded our middle market's coverage effort during the first six months of the year with the addition of a talented team based out of Atlanta.

During the first half, we made significant progress towards expanding our geographic footprint. In the first quarter we'd announced that we'd entered into a definitive agreement to acquire latitude capital, a boutique investment bank headquartered in Hong Kong with additional offices in Beijing and Shanghai.

I'm pleased to report that we've received formal regulatory approval at the end of last week. Cowen Latitude Asia represents an important opportunity for us to enhance our activities internationally and expand our sector focused investment banking platform across the region.

Both Cowen and Latitude personnel have been working diligently to lay the logistical foundation necessary to ensure a speedy integration and we expect to slow the transaction in the third quarter.

We continue to work closely with our Latitude partners and we're confident that we have taken the necessary steps to ensure that we hit the ground running.

Cowen's efforts to build out an alternative asset management practice have already yielded significant results. As you have likely seen, two weeks ago we announced the closing of Cowen Healthcare Royalty Partners First Fund with capital commitments in excess of $500 million. This represents one of the largest first time healthcare focused private equity funds ever raised.

At the hard cap of $500 million, the funds substantially exceeded its initial target of $350 million. CHRP has already deployed approximately $80 million of capital and its pipeline is robust. This effort expands further our already leading franchise in healthcare and life sciences.

The Healthcare Royalty team has exceeded our expectations and we look forward to their continued success. I'm pleased to note that we'll book over $8 million in revenue from CHRP in 2008.

Our development of a traditional asset management business is also on schedule. Both the U.S. and U.K. based teams have been managing assets since the beginning of the year and are developing successful track records as part of Cowen. In point of fact, as of the end of the second quarter, all eight funds, two in the U.S. and six in London, were outperforming their respective benchmarks. We have assembled two teams of talented investment professionals and we look forward to their contributions in the coming years.

Let me turn for a moment to our non-compensation expenses. We also continued to identify opportunities for savings in greater efficiencies. We always seek to contain our non-comp costs, but we have redoubled our efforts in the face of challenging market conditions.

During the first half of 2008, non-comp expenses decreased 5% compared to the prior year period. Included in this decrease was a one time charge for the placement fee related to the Cowen Healthcare Royalty Partners Fund. Excluding this one time charge of $2.2 million, non-compensation expenses for the first half decreased more than 9% compared to the prior year period.

This is both an effort and a result of which I'm extremely proud. Believe me, we will continue to seek ways to appropriately reduce our non-comp expenses.

Now, let me spend a moment addressing headcount. During the first half, we reduced total headcount by 9% from 535 people to 485. This is in addition to an overall reduction of 3% in 2007.

While we have reduced overall headcount in 2008, we remain pleased with our ability to attract highly talented professionals and view the current employment market as an opportunity to selectively add exceptional professionals across our businesses. In fact, this year we've added key hires in all of our principal divisions, research, investment banking and sales and trading.

You will also note that we continued to accrue comp at 60% of revenue. We, like others, are uncertain about what our compensation ratio will ultimately be, where we end up will depend up on market conditions over the remainder of the year and the overall street environment as we come closer to year end.

During the first half, we had significant accomplishments in many areas of our platform that were, perhaps, overshadowed by the lack of new issue activity and its impact on our overall results. We continue to take steps to diversify our business, however our sector focused platform remains highly correlated to growth sector capital raising activity.

Although we cannot predict when the market environment will turn, I am confident that Cowen is well positioned to capitalize when conditions do improve. I would like now to turn the call over to Tom Conner, to review the financial results in more detail.

Thank you, Greg. For the quarter ended June 30, 2007, total revenues were $62.7 million compared to $71.2 million during the same quarter of 2007. For the six months ended June 30, 2008, total revenues were $117.7 million, compared to $144.8 million in the first half of 2007.

Investment banking revenues for the second quarter 2008 were $20.5 million, a decreased in $9.6 million compared to $30.1 million during the same period in 2007. For the six months ended June 30, 2008, investment banking revenues were $34.4 million, down 38% from $55.5 million in the first half of 2007.

As Greg mentioned, the decreases for both the quarter and the first half of 2008 compared to the same periods in 2007 reflect lower transaction volumes in both our public and private capital raising activities, partially offset by an increase in our strategic advisory fees.

Brokerage revenues for the second quarter of 2008 were $37.1 million, a decrease of $1.4 million compared to $38.5 million in the second quarter of 2007. For the six months ended June 30, 2008, brokerage revenues were $75.2 million, down 10% from $83.7 million in the first half of 2007.

The decreases for both periods resulted primarily from activity related to certain warrant positions. All of our warrant positions, as we mentioned earlier, we received in connection with investment banking transactions, however the mark to market changes in value as well as realized P&L are required to be reflected in the brokerage line item.

Our core brokerage revenues for the second quarter of 2008 were $37 million, an increase of $0.4 million compared to $36.6 million in the same quarter of 2007. For the six months ended June 30, 2008 our core brokerage revenues were $76.7 million compared to $76.8 million in the first half of 2007.

Revenue from interest and dividend income for the second quarter of 2008 were $0.9 million, compared to $1.9 million in the same period last year. For the six months ended June 30, 2008, revenues from interest in dividend income were $2.1 million compared to $4 million in the first half of 2007.

The decrease in both periods resulted primarily from lower average interest rates during both the second quarter and first half of 2008 compared to the same periods in 2007.

Other revenues in the second quarter of 2008 were $4.1 million, an increase of $3.5 million compared to $0.6 million in the second quarter of 2007. For the six months ended June 30, 2008, other revenues were $6 million, an increase of $4.5 million compared to $1.5 million in the first half of 2007. The increases in both periods resulted from an increase in fees from managing the assets and investments of certain private equity and alternative investment funds.

Turning to expenses, our employee compensation and benefits expense was $38.9 million for the second quarter of 2008, a decrease of $4.9 million compared to $43.8 million for the same quarter last year. For the six months ended June 30, 2008 our employee compensation and benefits expense was $67.7 million, down 24% from $89 million in the first half of 2007.

The decreases in both periods resulted from the application of our compensation to revenue ratio to lower revenues in 2008, compared to the same periods in 2007. This decrease was partially offset by an increase in the compensation of revenue ratio to 60% in the first half of 2008, compared to 58% in the first half of 2007.

Employee compensation and benefits expense for the second quarter of 2008 also include a $1.3 million of expense associated with the initial grant of equity to our employees in connection with the IPO, compared to $2.5 million of expense in the prior year period. The expense associated with the IPO award is excluded from our compensation ratio.

For the six months ended June 30, 2008, employee compensation and benefits expense included a net reversal of $2.9 million of expenses associated with the initial grant of equity in connection with the IPO, compared to $5 million of expense in the prior year period. The reversal in the first half of 2008 related to amounts previously expensed in 2006 and 2007 associated with the IPO award that was forfeited by Mr. Fennebresque in connection with his resignation.

Non-compensation expenses were $26.1 million for the second quarter of 2008, a decrease of $0.9 million or 3% compared to $27 million in the same quarter last year.

For the six months ended June 30, 2008 non-compensation expenses were $50 million, down 5% from $52.8 million in the first half of 2007. Both these decreases were primarily due to reductions in our floor brokerage and trade execution related expenses, deployment fees, communication related expenses, maintenance costs related to our information technology structure and consulting costs.

These decreases were partially offset by an increase in service fees related to a change in our trading and order management system and replacement fees which we mentioned earlier, related to closings associated with Healthcare Royalty Partner.

Excluding the placement fees, total non-compensation expenses decreased $2.9 million or 11% during the quarter -- second quarter of 2008, compared to the same quarter last year. For the six months ended June 30, 2008, excluding the placement fees, total non-compensation expenses decreased $4.9 million or 9% compared to the first half of 2007.

We recorded a tax benefit of $1.7 million for the second quarter of 2008 compared to a provision for taxes of $0.2 million for the second quarter of 2007. For the six months ended June 30, 2008, we recorded a tax benefit of $0.1 million, compared to a provision for taxes of $2.1 million for the first half of 2007.

The higher effective tax rates in both periods of 2008 were the result of certain non-deductible expenses, including the placement fee mentioned earlier. For the quarter ended June 30, 2008, we reported a net loss of $0.7 million or $0.06 per share, compared to net income of $0.2 million in the prior year period, or $0.02 per diluted share.

Excluding the compensation expense related to employee stock awards in connection with our IPO, our adjusted net operating loss for the second quarter of 2008 was $0.3 million, compared to adjusted net operating income of $1.7 million in the prior year period.

For the six months ended June 30, 2008 we recorded a net loss of $0.1 million, compared to net income of $2.7 million for the first half of 2007. Net income in the first half of 2007 included the effect of a one time, $1.8 million gain related to the sale of our membership seat on the Chicago board options exchange.

Our adjusted net operating loss for the six months ended June 30, 2008 was $1.7 million, compared to adjusted net operating income of $4.5 million in the prior year period. Manageable book value per share at June 30, 2008 based on common shares outstanding was $10.92. This concludes our formal remarks. Greg and I will now take questions.

(OPERATOR INSTRUCTIONS). And your first question comes from the line of [Patrick Defit] with Merrill Lynch. Please, proceed.

Good morning, guys. I assume if you were to market another fund, like the Healthcare fund, that would result in another placement fee. So do you have kind of a plan to raise another one, or is there any idea - so that we can get an idea of maybe how we should model maybe what that expense would be next year, if you decided to do another one.

Well, if I could be paying those placement fees once a quarter, I'd be a happy guy.

Yes. I understand. Yes.

I - we continue to look at other venues or opportunities where we see the same sort of synergistic play that we saw with the royalty team, but it - they're frankly difficult to find.

Good.

It took us quite some time to accomplish this, we think it's an absolutely fantastic outcome for all involved, but I'm not sure I'd be modeling an additional fund into 2009, at this point in time.

Okay, okay, that makes sense. And then, in the other revenues, can we get an idea of how much of the pick up was related to the new fund and what the fee structure is going to be there. I assume that's running through other.

Yes, that's where it's located. About half of the quarter the revenues for the quarter relates to the pick up.

Okay.

Those data with the fund.

And the fee structure?

Well, the fee structure, the - how we're dealing with the distribution of the fee income, the management fee income is - we haven't discussed publicly.

Okay, okay.

It gets revenue to us as any other revenue is and the expenses that flow from it are incorporated inside their - our comp line or inside our non-comp expenses. Obviously at some point in time they'll be carry, but I think we're a ways away from that at the moment.

Right, yes. And you said it will generate $8 million of revenue this year and that's including the $2 million or so that was in the second quarter, right?

That's correct.

Okay, great. Thanks a lot.

Yes.

Your next question comes from the line of Devin Ryan with Sandler O'Neill. Please, proceed.

Hey, good morning, guys.

Morning.

Just a follow up on the Healthcare Royalty Partners Fund, can you remind us what Cowen's investment was in the fund, did you disclose that?

We did not disclose that, I don't believe. But - we have made a $25 million commitment.

Okay. And just in terms of the carry obviously, it may take some time, but are these funds typically volatile or how should we think about kind of the performance in the funds, can you kind of get a sense of what the performance is going to be after a certain period of time? Like some kind of recurring fee structure, or how should we think about that?

Yes, well it's different than a more traditional private equity leveraged buy out business, obviously when you invest in royalties, generally speaking the cash flows start relatively immediately and continue over a period of time.

So the money comes back quite quickly, and as a result, we anticipate and I - and I - well, we anticipate fine returns and the multiples on your investment are probably a little lower as a general matter than they would be in - in for a same IRR in a private equity fund. So we'll see returns immediately in this fund and we'll see carry three or four or five years out.

Okay. All right, that's helpful. And then just, on the warrant portfolio, it's created a fair amount of volatility from quarter to quarter and obviously as additional banking fees are paid in warrants the portfolio, I would assume, would grow. Is there any way to economically hedge the portfolio, or hedge the volatility here, and what are your thoughts on that?

Well, we've looked at it a lot because it does create more volatility than we would like. We get these warrants as a result of our pipes and private placement activities and we like them, but we sure don't like the accounting for them, because we'd like to see them as a longer held asset to look forward to to nice returns and the mark to market creates some problems for us.

The portfolio is not big enough to really create a substantive hedge, nor is it big enough to hedge around in terms of the particular warrant positions. We've had discussions with people, we've thought about it, and to date, we can't see a way to successfully lay a hedge on that either reduces the accounting volatility but also takes away from the economic - potential economic impact of the portfolio when it works well as we saw in the first half of 2007.

Right, right. Okay. All right. Thanks guys.

Yes.

(OPERATOR INSTRUCTIONS). And your next question comes from the line of Horst Hueniken with Thomas Weisel Partners. Please, proceed.

Good morning. I see that you've had another good quarter on your strategic advisory business and your backlog is looking pretty strong entering into the third quarter. Could you just comment on the sustainability of the strategic advisory business? Typically it's the lumpy business, but you seem to be bucking the trend, I'm wondering what you ascribe that to?

Well, actually we're paying quite a lot of attention to that business, and I think we fundamentally, over the last few years, have changed how we look at the business and changed how we thought about the business. So, we're hopeful that we're smoothing out the lumps and I'll make a couple of comments. Our business is not, for the most part, dependant upon leverage.

So the decrease in M&A activity that we're seeing across the street has been impacted obviously, or affected by the credit markets, the majority of our transactions end up being strategic to strategic and so the availability of credit is not generally necessary to see our business move forward. So we've been able to - if we're bucking a trend, I think that's a principal reason for it.

Basically, we have focused across the board in our investment banking business on improving our strategic dialogue with all of our customers and clients and opportunities and we are confident in seeing the continued success and results of that that is going to be an ongoing issue for us, that we believe our strategic advisory business is just simply going to get better, and everything that we see in front of us indicates that that's in fact what's going to happen.

Okay, that's very helpful. Thank you.

(OPERATOR INSTRUCTIONS). And you have no further questions at this time.

Well, I just wanted to say thank you for everyone for taking the time to be with us this morning. We're pleased with our results in the context of some very, very difficult market conditions that we all understand and see daily. We look forward to a return of a more robust equity new issue business and we think we are very well positioned to take advantage of that market when it comes, and we appreciate all your support. Thanks very much.

Thank you.

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Good day.