Cowen Inc (COWN) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for joining the Cowen Group Inc. conference call to discuss the financial results for the fourth quarter and 12 months ended December 31, 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 [Emma Synomit] at 646-562-1154.

Before we begin, the Company has asked me to remind that some of the comments made on today's call, and some of the responses to your questions, may contain forward-looking statements. These statement 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 and uncertainties and assumptions is included in 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 those 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. Greg Malcolm, Chief Executive Officer, who is joined today by Mr. Tom Conner, Chief Financial Officer.

Welcome to our 2008 earnings call, and thank you for your interest in our firm. We're going to cover a number of topics today that I hope will be of interest to you. These are the most unusual of times, and I want to be sure that each of you leave this call with an appreciation for our firm's positioning to deal with both the challenges these times present and the opportunities that they afford us.

I'm going to change our format a bit on this call. And if everyone thinks it is an improvement, we will keep it for future calls. In the past, like others, our practice has been to recite the quarter and full year numbers in quite some detail. I listened to a tape of last summer's call, and I must say that the detail was quite tedious and very difficult to follow.

We released all the numbers and their 2007 comparisons this morning, so I will let you analyze the details at your leisure, and will just review the highlights on this call.

Our 2008 revenues were $217.3 million, down 17% or $44.3 million from 2007's $261.6 million. As you'll recall, in the third quarter we wrote off $50 million of legacy goodwill, and the numbers -- operating numbers, which I'm going to discuss are exclusive of that write-off.

Our operating loss, exclusive of IPO award effects, was $15.7 million, an increase of $4 million from 2007's loss of $11.7 million. Our 2008 operating loss, exclusive of non-cash items, was just $1.1 million versus cash income of $400,000 in 2007. Therefore, on a cash operating basis we were nearly breakeven in '08.

Excluding the effects of the IPO awards our compensation to revenue ratio was 62% in '08 versus 65% in '07. I'm pleased to note that while our revenues were down $44 million, our cash operating loss only increased $1.5 million.

Now let me turn to some commentary about how each of our business lines performed in '08. And I think it will come as no surprise to any of you that our shortcomings were due almost entirely to the lack of any new issue activity in our sectors during the year.

Our core brokerage revenues year-over-year increased 2% to almost $156 million. This is a tremendous effort in light of the headwinds facing that business generally. Our floor and our research department are to be congratulated.

Our strategic advisory revenues increased 37% from almost $29 million to $39 million. In 2008 we advised on 18 transactions with an aggregate value of $2.2 billion. Again, this is a great performance, driven primarily by our healthcare vertical.

In our alternative asset management business our Cowen Healthcare Royalty Fund got off to a great start, closing on an initial fund of $500 million in July, and deploying over half that capital during the year. This life sciences financing product enjoys great competitive advantage with the new issue markets essentially closed.

Our startup long-only asset managers faced the headwinds of all equity managers during the year, and we continue to look at that business with an eye toward better aligning the team's economic interest more directly with our shareholders.

Our lagging business line was public and private equity new issuance. Our 2008 new issue revenues were $11.7 million, down $61.8 million from 2007. This disappointing performance was, however, in line with the general decline in public equity new issuance in our growth sectors.

As an additional note, I would point out that the 2007 revenues were down in turn $84 million from 2006's $146 million. I noted earlier that the lack of a new issue calendar was our principal problem, but you can also see from these numbers the leverage and potential profitability in our firm when markets reopen.

Let me turn to compensation. Obviously, 2008 was a difficult year across the Street for compensation, and rightly so. We believe that our 62% comp ratio reflects our strong efforts to create the best balance possible between our bottom line and the preservation of our franchise. Even in these times we do need to be mindful of the competitive pressures for our very best people. As in years past, part of our 2008 comp was comprised of deferred awards vesting over time.

I would like to talk to the current environment for a bit to describe what we believe are the challenges we face and the opportunities that are presented to us. It is truly a time to play both offense and defense.

The issues we face are as follows. There is no new issue calendar on the near-term horizon. Having said that, we believe, and generally history shows, that when the market does open it will be with a bang.

Corporate decisionmaking is frozen, just like the credit markets. This has and will affect the M&A business. Volumes on the floor are slow due to our buy side customers having fewer assets under management utilizing less leverage in their daily business. Both of these issues are compounded by many managers staying in cash until the smoke clears a bit.

On the other side of the coin we're benefited by a number of factors in today's market. Many in our industry are burdened by significant legacy issues. Their balance sheets are stressed by poorly or non-performing assets. Their leverage exacerbates the problem. And they have been forced to address those balance sheet issues with headcount reduction. Many are looking inward to these problems and that is distracting them from client facing initiatives.

We don't have these problems. Our balance sheet is cash, and that cash will see us through this valley and the next, if need be. These substantial headcount reductions, combined with the elimination of competitors through merger or otherwise, particularly at our largest competitors, mean less competition for us with both our corporate and our buy side accounts.

Our customers and clients are for the first time in my memory questioning if it is really necessary, or even desirable, to do business with the bulge or with Wall Street's largest firms. As a boutique firm, we have always faced the issue of clients growing in size and scope, and then wanting to migrate to bigger firms for countless reasons. Reasons, by the way, with which we have never agreed.

It seems now that the reverse may be underway a bit as we are seeing more and more evidence that our clients are attracted to our clean balance sheet and our service-oriented culture. As a simple anecdote, we hired a very senior financials trader a few weeks ago, a nontraditional sector for us. He told me that he had called one of his most important accounts to tell him the news. The account said, I hope you're not going to a big firm. We opened a new account that day.

Lastly, and most importantly, we are seeing a steady stream of talented people who in past years we would not have expected to be able to hire, much less afford.

Our challenge is twofold. First, be careful to pick the right partners for our business plan and our culture. And second to carefully balance the need for controlled costs and headcount with the opportunity to grow that derives from these difficult times.

Let's move on to some strategy that we have to deal with these issues and opportunities. First and foremost, we need to be sure that we are as lean and efficient as we can be. To that end since I became CEO, we have reduced our headcount by 148 employees, added 78, of whom 25 were officers, resulting in a net headcount reduction of 70 people, or 14%, from a starting base of 520. These numbers include the addition of 18 people in China from the acquisition of Latitude Capital, our Asian investment banking unit. Excluding Latitude, our US European headcount would be down 88 people, or 17%.

We will continue to pay close attention to headcount as the year unfolds and we see how markets develop.

We have and are paying significant attention to our non-compensation costs. In 2008 we were able to reduce these costs by $8.7 million, or 8%. This excludes the non-recurring charge of $3.7 million for the fundraising fee we paid to secure the $500 million of royalty capital. A fee I would happily pay every day if I could actually.

This reduction in our noncomps is actually quite an accomplishment. 20% of our noncomps are trade related to market data services. After we cut the best deals that we can on those fees, we really don't want them to go down, as they reflect volumes on the floor, and are more than offset by revenues.

Then when you take into account fewer fixed costs like real estate that we only get to address periodically, the pool that we have the ability to address becomes much smaller. The reductions in 2008 taken against the addressable pool represented a 15% reduction in costs. My thanks to all in our firm who have worked so hard to preserve our cash and lower our expenses.

The single best opportunity that this market gives us is to hire talented people. People of a caliber that we generally have not seen in these numbers before, and at costs that are both affordable and prudent. Here are some other things that we think about when considering additional hires.

First, avoid guarantees at all costs. We have all been saddled by legacy guarantees from better times, and they are painful. We had our share in 2008, and we want to do everything we can to avoid getting caught in that trap again. However, as a side note, we had 14 guarantees in 2008 that we considered significant. All 14 employees voluntarily gave concessions on their contracts without any quid per quo from us. I think it speaks volumes about our culture, and I am grateful to all.

When we think about hires on the floor, we want to be sure that the revenue is not cannibalistic to our existing revenue. By that I mean if we are hiring a trader and the only accounts he does business with are our existing accounts, we have to believe that we will simply move some of our current trading revenues into his trading pad without creating much incremental revenue for the firm. We want to see the ability to do business with accounts we currently don't cover. We want to grow our core platform.

Let me give you a few examples where this strategy is really evident. Historically we have had a very small electronic trading capability. In December we hired a head of Electronic Trading, and in the next few weeks we will announce a number of additions to that team.

We believe that in the first 90 days of this new initiative we will open accounts with 50 customers with whom we have never done business before. We look forward to giving them the same service and attention that we do for our long-standing core accounts. And we also look forward to offering our existing accounts a new electronic trading venue as well.

As a side note, the fact that our sales and trading effort can generate $156 million of purely cash commissions is a testament to the quality of our effort. We look forward to the development of our electronic trading capability, and believe it will generate significant revenue in '09 and beyond.

In the same vein as I noted, we have hired a senior financials trader who will start in a few weeks. This is a sector we have traditionally not covered in researcher banking. He brings sector account relationships that we currently don't transact with. In other words, we will again open 20 plus new accounts within days of his arrival. And we believe this effort will generate significant incremental revenue in '09 and beyond.

Let me shift to hiring, where we already have an existing business, but believe that these markets afford us the ability to expand or improve that business. Historically we have had a robust PIPEs and registered direct effort. In 2008 that business substantially underperformed and contributed to the shortfall in our new issue revenue.

I am pleased to report that we will announce early the hires of two Managing Directors to augment that business. Importantly, both have significant experience in healthcare, which is a frequent user of this product, and where we saw our most significant weakness last year. We're looking forward to returning our PIPEs practice to its former profitability.

Additionally, since the new year we had made a significant hire in research, adding to our franchise and establishing a more competitive product offering in healthcare services, and further enhancing our already superb healthcare effort. I'm sure that we will add further talent throughout the firm during the year. And in all cases we need to have clear insight into near-term revenue and cultural fit.

In closing, let me highlight a few things that bring our firm and its positioning into focus. We have tremendous operating leverage. If we return to what in the past would have been considered to be an average year, we will generate significant GAAP, and importantly, cash profits.

Headcount was down net 70 people. And while we will hire carefully to take advantage of current circumstances, the operating leverage I just spoke to results from a lean headcount and infrastructure.

Core brokerage, up. Strategic M&A, up. Royalty up and running and 55% invested. Balance sheet, save and secure in cash. We are a firm well-positioned for the return of new issue markets, and expecting to gain market share across our divisions in the process, as well as derive significant revenues from new initiatives.

We are pleased to have those on this call who are our shareholders as our partners. And thank you for your interest in our firm. We would be pleased to take any questions you might have, either Tom or myself. Thank you.

(Operator Instructions). Horst Hueniken, Thomas Weisel Partners.

I am wondering whether you could comment on what you believe is your current breakeven revenue level?

Actually it is a difficult thing. I noticed that you guys spoke to breakeven. And I think the notion about cash breakeven revenue levels is a little bit difficult thing to predict. You have to tell me what the environment is in which we have earned the money, so I can figure out what the competitive pressures are for compensation.

As I suggested on this call, at $217 million we lost $1.1 million of operating income. So it is a question that I find not odd. I understand your question. It is a question I find difficult to predict, because I don't understand the environment, or I don't know the environment in which --.

Just so I understand you clearly then, it is partially an issue of mix then, depending on which businesses are generating that revenue, will determine that breakeven level.

I think that is correct. I think it is beyond that, it is the notion of what the environment is across the Street, not just division by division, but what is going on in the world at the time that happens.

That makes sense. Okay I will take it from there and wrestle with it.

I'm sorry it is not a better answer, but it is a very difficult question.

I understand that. That's fine. I am wondering whether there is any severance charges in your fourth quarter results. You did reduce your headcount, but it is not clear to me whether there is a severance charge built-in based on the press release.

I will ask Tom to answer that question for you.

There is a severance charge related to the people that departed during the fourth quarter, but it is inside the comp to revenue ratio that Greg spoke about.

Are you able to disclose the amount, just so I can strip it out?

No, that is not something that we plan on disclosing.

Okay, fair enough then. Regarding your (multiple speakers) -- go ahead.

I wouldn't consider it to be a very large number.

Okay, fair enough. I obviously have the information, as does everybody else, on what the pipeline currently looks like based on the publicly disclosed information. I am wondering whether there is anything in the pipeline that hasn't been disclosed, and whether that would be material?

No, I don't think so. We haven't generally commented on our unfiled pipelines, but I will tell you that September to January, the fourth quarter, our unfiled pipeline is relatively constant, and our M&A pipeline is very constant. There is nothing of great materiality, in the sense I think you asked that question, existing in our unfiled pipeline.

That is fine then. You referenced the new financial sector trader, and that he is expected to help open 20 new accounts, which obviously is an encouraging thing. I am wondering whether this could lead to more buildup in the financial sector, and more specifically, whether financial sector you view as a new vertical for Cowen Group?

Let me connect that a little differently and speak about how in the past I think we, and people like us, have looked at adding new verticals. Because I think that historically the perspective has been in looking at a new vertical how you would bank it.

So you start at trying to figure out how to get a banking team together. And that requires a Managing Director or two and a couple of officers and a couple of associates and analysts or whatever. Then you would move into research, because you would need to research product to be able to have a voice in the marketplace. And then you would move to the floor.

When we thought about verticals in that context, that is a really expensive proposition. It takes banking a long time to get their feet on the ground, to settle into a new place and to generate revenues. So it is also a very expensive proposition.

We are interested in looking at things right now in the reverse. So we start on the floor and see if we can find traders in verticals that we don't particularly -- well, certainly that we don't bank. Now we trade some financial stocks now, but not very many. And we tried to come to a point of view as to whether or not that would be a profitable endeavor on its own bottom, just for that guy.

And in looking at that we want to look at accounts that we don't cover. So we will get look at an account package and come to understand, let's look at the ones we currently don't cover and try to come to a point of view as to whether this is a profitable endeavor based on those accounts. And we believe it is here.

The next steps will be for us, if this turns out to be exactly what we will like, then we will move to research and see if we can accommodate publishing research analysts within this vertical and still maintain a profitable enterprise vis-a-vis the floor.

And if that works, then we will consider moving into banking, because we will have economic reality existing in that business as it stands, and the commitment to banking would be substantially less risky than starting at that end of the scale to begin with.

So we will see what happens. It very well may do that. We will see.

My final question relates to the attempt by Rodman to acquire your firm. Am I safe to assume that that is now dead, because there has been really no press releases to finish that.

I don't know the answer to the question. And without being cute, I think you would have to ask -- you would have to ask someone at Rodman. Our perspective on this transaction has not changed from the press release that we issued at the time that this began. We spoke extensively with our stakeholders -- that is our shareholders, our customers and clients and our employees, and our position on this transaction has not changed at all.

Fair enough. Yes, I will ask Rodman. Thank you for your time.

You are quite welcome.

Lauren Smith, KBW.

A couple of questions. I guess first off on headcount resizing and where you think you are relative -- looking out to the next six to twelve months at 463 people. And you certainly, when I look across the sector, you have the highest revenue per employee, which is a very important metric in my mind. How are you thinking about headcount? Do you think you are kind of at your optimal level, at least currently, with respect to what you see the environment looking like over the next six to twelve months?

I am tempted to think back a little bit over the six months ago and six months before that, and I think it is a dangerous thing to say -- you know, you are where you are.

We're comfortable with our headcount where we are now. But we will continue, obviously, to look at two things. One, how revenues develop in these markets over the coming months, and how that will impact our performance. And if we need to resize, we will. And I think that is fairly standard for anybody. That is on the defensive side.

Offensive side of the coin, as I noted in my comments, we are really seeing a quite extraordinary flow of people that offer us significant opportunities. And we are trying to judge those opportunities very, very carefully. We're not going to make any mistakes here in hiring. But we do have an ability to change the game a little bit here, and we're going to carefully address those issues.

When we look at -- I mean, your headcount reduction year-on-year was 12%, 13%, but you have also been hiring. Exactly to your point of everyone is sort of in offensive mode given the opportunities. Could you give a sense of what -- let's say what the number or percentage was with respect to headcount reduction by design versus say net adds? I just want to sort of get a sense of maybe how many people have actually come on board over the past six or twelve months versus those that have been either natural attrition for by design headcount reductions.

Well, as I said in my remarks, I have been CEO for about a year, a little bit less. 148 people exited the firm voluntarily or involuntarily during that time gross. We added 78, and of those 78, 25 were officers.

In the US and in Europe our net headcount reduction was 88 people. Of the 148 gross employees who left, there is some turnover there that, as you say, is quite natural -- associates coming and going and things like that. But I would say that more than half of those people were involuntary reductions.

Then just one last headcount comp type question -- or actually really two. One, you said there were 14 guarantees in 2008 that were voluntarily foregone -- forgiven, if you will. Could you roughly speak in to sort of size that for us?

No, that would be difficult for me. What I said was there were 14 contracts that we considered to be substantial. And all of those 14 people voluntarily gave some portion of their contract up.

Okay, portion, okay.

And I don't think it would be appropriate for me to discuss the number.

Do they roll off this year, or is it -- so are those, are they --?

Our contractual obligations in 2009 are substantially reduced from 2008. And in point of fact that, while I don't want to say they're not significant, they are relatively insignificant.

Then just one last on the comp. It is pretty impressive actually how you maintained your comp ratio in this pretty dismal revenue environment. Adjusting for the IPO expense, is sort of the 62% to 65% range still kind of how you are thinking about accruals?

That is a good question. I have not looked at accruals for the first quarter, but I would assume that they would be someplace in that range.

Then one last and that I will get back in the queue. But could you just put a little more color around the brokerage revenue side? In the quarter I know in the press release you noted -- you certainly held up well, again relative to everybody else -- everyone was down Q-on-Q. But you did cite options trading in particular. And I was just wondering if you think you could put a little color around just how big of a business is that for you. And if you were to -- I know if you can -- sort of strip that out, what was sort of the rest of your equities business performance like in the quarter?

The options business is not a significant business for us. So our -- and it is one thing that, A., we are proud of, and we believe affords us great opportunity. Our fundamental core brokerage revenues are cash commissions. It is a cash commission revenue business. As I noted, we have been able to generate this sort of revenue without an electronic platform. And we believe that what we're doing in electronics and program is going to add substantially to our revenue base.

We have a good options business, but it is not a significant one, and we look to continue to build that business. And as we try to find more opportunities like financials, and we're looking at two or three other verticals in the same way, we think we can add incremental revenue to what is already a relatively outperforming business.

Thank you. That's helpful.

You are quite welcome.

At this time there are no other questions in queue.

With that, again, thank you all very much for your time. And thank you very much for your interest in our firm. We hope to be able to deliver on your interest and support. Thank you very much.

Ladies and gentlemen, thank you all for your participation in today's conference call. This concludes the presentation and you may now disconnect. Have a great day.