Cowen Inc (COWN) 2013 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 2013 second-quarter results. By now, you should have received a copy of the Company's earnings release which can be accessed at the Cowen Group Incorporated website at www.Cowen.com.

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 the risks and uncertainties described in the Company's earnings release and other filings with the SEC. Cowen Group Incorporated has no obligation to update the information presented on the call. A more 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 in 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 Peter Cohen, Chairman and Chief Executive Officer. Please proceed.

Good morning, everyone, and welcome to Cowen's second-quarter earnings call. With me today are Michael Singer, CEO of Ramius, our asset management subsidiary; Jeff Solomon, CEO of Cowen and Company; and Steve Lasota, CEO of the parent Company.

Let me start with an overview of our performance in the quarter and then we will get to Jeff and Michael to talk about the business and a little bit more detail.

The general environment in second quarter was quite a change from the year ago. As everyone knows, last year we had a pretty volatile quarter in terms of equities and credit, the ongoing repercussions of slowing US growth and Asia and the possible debt concerns in Europe made for a tough second quarter last year or a tough environment. Interestingly, while many of these concerns are still with us today, along with the uncertainty of the Federal Reserve Board's tapering, the second quarter was one of the most favorable revenue quarters for us in quite a while at our broker-dealer, as we saw new issuance of both equities and debt along with an increase in our commission business. Ramius, our asset business, continues to do well with positive contributions in terms of performance on the part of our funds and asset growth across a wide range of capabilities in our platform.

With this as a background, in the second quarter the firm reported economic income of $1.5 million on economic revenue of $81.1 million. This compares to the first quarter of this year, where we reported economic revenue of $75 million and an economic loss of $1.2 million. At Ramius, we are continuing to reorient the business under Michael Singer's leadership. Assets under management increased by $110 million in the quarter and nearly $1 billion for the first six months of the year to reach $9 billion today.

We have continued to expand the range of products offered within our core capabilities with the launch of three new vehicles in the quarter and three more to come by year end, which Michael will talk about in a little bit more detail. The new launch, coupled with flows into existing strategies made for a productive quarter of asset raising with $317 million of net client inflows coupled with $74 million of net positive performance. However, this was offset by the sharp move in the Australian dollar/US exchange rate, which reduced assets under management from our Australia mandates by $281 million since we hedge the currency exposure for our clients. And that's how you get to the net number I cited before. Michael will give you a little bit more detail in a few minutes.

Our broker-dealer, Cowen and Company, saw significant revenue in both the investment bank and sales trading businesses, which Jeff will talk to. Today, we have established ourselves as the number one non-bulge equity underwriter in life sciences and the number-two high yield placement agent in the sub-$200 million debt offering space. Given our position in both equity capital markets and debt capital markets, we were well positioned in the quarter to benefit from a favorable environment for capital markets financing in all of our sectors.

The equity business also continues to show very positive momentum. In 2012, we brought in a new director of research, co-head of equities and their leadership had has very substantial positive impact as reflected, I think, in our numbers. Unlike many of our peers, our brokerage revenue has increased year-over-year in the last three quarters, and by the end of this year we will have expanded the number of companies under coverage to a level that is expected to bring us closer in line with our larger peers.

Overall, we continue to keep a tight rein on expenses across the entire business. Steve will go through some of the details in his section of the call.

Total non-comp expenses were only marginally higher year-over-year even, while revenue was up 22%. Considering that the second quarter of 2013 included a full quarter of Dahlman expenses, this is a noteworthy result. Also, fixed non-comp actually fell by $700,000 from the year-ago quarter and were essentially flat as compared to the first quarter of 2013. Again, this is despite the increased expenses from Dahlman Rose.

Variable non-comp increased from the prior year as a result of the higher trading volume and increased marketing activities across the firm. You can see we have taken a lot of cost out of the business in recent years and worked with equal intensity to rationalize the Dahlman expenses as quickly as possible. We are continually looking for additional ways to lower our cost structure without sacrificing the level of service or product offerings.

Though the investment income was down from the prior quarter, we continue to maintain a strong balance sheet with $506 million of equity, of which $405 million is invested capital. This capital provides stability to our business and has been the foundation for our ability to execute on our plan. There are, we would say, very few firms that have the flexibility to opportunistically invest in order to foster future growth. Let me just add that this was probably the least-productive quarter on the balance sheet since the third quarter of 2011 during the European debt crisis. So our numbers, or the operating businesses are beginning to show through to a very substantial extent.

As I have discussed before, it is becoming more and more challenging for small or less well-capitalized firms to succeed in our businesses, and to this end we have been building a firm that can thrive in this market over the long-term. We plan to achieve this by moving in an intelligent and methodical manner while keeping our operating expenses in check. Our ability to report a modest operating expense increase with revenues up 22% in the quarter while fully absorbing Dahlman is a testament to the work done by all of the people in this firm.

It's an exciting time to be part of this Cowen. However, despite our progress in the quarter there is a lot of work still to be done. We still see a lot of opportunity on the expense side and the revenue creation side. And while the market remains challenging, we probably have been more optimistic. Our colleagues have worked very hard over the last few years and for that I would like to again thank all of them for their continued commitment, dedication, and for those of you who have been our stockholders, for your patience.

Let me turn the call over now to Michael, who will talk about asset management business.

Thank you, Peter. I have been very focused on several objectives since I joined the firm eight months ago -- first, increasing AUM and revenues within our existing investment capabilities; second, reorganizing our sales and distribution efforts; third, realigning our expense base; and finally, fourth, creating bolt-on products for our capabilities and recruiting new investment capabilities to our platform. I am pleased to report that we are moving in the right direction on all fronts. I will give you a brief update on each of these objectives.

First, AUM revenues -- AUM has increased from $8 billion at the start of the year to $9 billion as of July 1. The key drivers to AUM growth in the quarter and the first six months of the year come from our alternative solutions, real estate and activist capabilities.

Our marketing efforts have centered on our seven existing investment capabilities -- deep value equity activism, healthcare royalties, real estate, event-driven, long shore credit, managed futures and alternative solutions. And we continue to attract a variety of interest from institutional high-net-worth and mass affluent investors. Together, management and incentive fees were up 7% year-to-date to $37.6 million versus the prior-year period.

In the sales and distribution area, we've made solid progress in aligning the sales team to meet the needs of our clients, utilizing a general and specialist structure, ensuring the team is properly motivated and incentivized to be successful. In terms of rightsizing the expense structure, we are on track for our targeted 2013 cost savings goal on a run rate basis while we continually look for additional areas where we can thoughtfully reduce our expense structure.

Finally, as Peter noted earlier, we launched three new funds in our existing capabilities in the second quarter and we expect to launch three more by the end of the year. We are also working on expanding the depth and breadth of our capabilities and I hope to share news about this in the coming quarters.

Despite all the efforts on these four objectives, we would not have a chance to be successful unless we had in place talented investment teams who work together to deliver differentiated investment capabilities and intellectual capital to our clients with the backing of an institutional-quality infrastructure. Ramius has all this in place. The importance of this cannot be overstated.

A great example of this is Ramius Alternative Solutions, or RASL, as we call it, which has had a very successful year of asset raising in just the first six months of the year. Years of focus on the Australian market coupled with the ability of the co-heads of RASL to deliver intellectual capital as well as investment results has earned us relationships and some of the most sophisticated and well-regarded firms in that country. We look forward to continuing to expand our presence there. The strategic alliance with [Conick], a leading global provider of asset management services for the insurance industry, which we announced in May of this year, provides significant exposure to the insurance industry for which RASL's capabilities are particularly well-suited. The initial feedback here has been quite positive.

We highlighted RASL, but they are not unique at Ramius in that we have six similar success with delivering our differentiated capabilities to sophisticated clients across our platform.

Overall I'm pleased with the progress we have made so far this year, but as a reminder this is a run rate business as it pertains to management fees. However, performance fees create elasticity in our P&L, which we view as a positive. Assets raised in any given quarter are not fully reflected in the run rate revenues for that quarter. It takes time. The June drawdown across markets reduced our performance fees accrued in May. However, with our strong July performance, we do expect a rebound in performance fees as we get ahead of the May high water marks.

As such, we will remain focused on our core priorities, and thereby propel our business forward. I look forward to discussing Ramius's progress with you during the next quarterly call.

I will now turn the call over to Jeff, who will provide an update on our broker-dealer, Cowen and Company.

As many of you know, we have done a lot of over the past couple of years to rebuild Cowen. The results you see today are a direct result of our commitment to provide superior domain expertise within our core areas and leverage that expertise within our banking and sales and trading franchises. Over the past few years, we have seen our banking and capital markets franchise gradually strengthen as a result. More recently, our sales and trading business has begun to show year-over-year quarterly revenue improvement despite declining market volumes. These trends continued into the second quarter of 2013. Our results also reflected the first full quarter with Dahlman Rose in our numbers.

To give you some highlights on our performance during the quarter, banking revenue was $25.6 million. This was our highest revenue quarter since the second quarter of 2007. During the quarter, we closed on 24 deals across all of our product lines compared to 17 a year ago. We completed 17 equity underwritings, four debt capital markets transactions and three advisory assignments. The IPO market was quite favorable, particularly for emerging growth companies, which is our sweet spot. We were involved in seven IPOs and we acted as the book runner on four of them.

Debt capital markets had its best quarter since 2010, which is when we started this business, and accounted for more than 25% of banking and capital markets revenue. The deals completed during the quarter covered a variety of sectors, including technology, consumer, healthcare and industrials. Our pipeline continues to be robust and reflects a diversity of mandates in terms of both product and sector mix. However, the increase in DCM activity makes the revenue recognition a little more lumpy than we have seen the past. Still, we are confident about our ability to hit our budget numbers for 2013. We see significant opportunity in our core industry areas and we are actively marshaling our resources around very specific opportunities that we have already identified. In the past year, we have been working on strengthening our relationships within the VC and PE communities and our efforts there have opened up several doors, which is resulting in a number of new mandates in both debt and equity.

Brokerage revenue was up $33.3 million -- was at $33.3 million for the quarter, which is the best quarter since the second quarter of 2009. While overall market volumes have continued to decline our growth can be attributed to several steps taken over the course of the past 1 to 2 years. Just to remind you of some of the changes we made -- we added new capabilities, such as electronic trading with ATM acquisition last year, which gives accounts different ways to pay us and allows us to provide them with innovative ways to access liquidity across the various equity venues. New management tools have given our sales and trading team a clearer view into their accounts, which allows them to focus their efforts on the accounts where we can have the most impact. The Dahlman Rose acquisition introduces some new account relationships and deepened our relevance to existing accounts. We reorganized our account teams as part of that integration effort to reflect a collaborative coverage model and the result has been better service for our clients all around.

Finally, we have added to our research platform. We now have 42 publishing analysts, which is up 50% year-over-year. Our coverage universe has grown at a similar rate and we are targeting approximately 700-plus companies under coverage by the end of the year. Importantly, the quality of our research has remained just as high as it always was, if not even better. As a result, we are delivering much more content and delivering in a much more targeted manner in ways the clients really want it, and they are responding. We have seen an early uptick in the all-important vote counts at several clients, though the full impact of our position is expected to take a few cycles.

With these changes, we improved acquisition substantially at select accounts and have broken into the top 10 in some others. It is clear that we have the ability to improve our standing at many more accounts if we stay focused on delivering quality content and corporate access.

Finally, as it relates to Dahlman Rose integration, our team did a really excellent job on completing the integration on schedule and with little disruption to our clients and our daily business. We could not be more pleased with that outcome.

In summary, our performance this quarter would suggest that we are doing something different than our peers and our performance has given us another reason to remain focused on the tasks at hand. The increased diversity in revenue and the opportunities we see ahead of us give me greater confidence in our ability to accomplish our goal of building a world-class platform that can provide our shareholders with sustained growth opportunities. But it's all about execution and we are squarely focused on that.

I just want to acknowledge the efforts of all our colleagues at Cowen for their hard work. You guys really rose to the challenge this quarter and really helped us to put up our best top-line numbers in a very long time.

With that, I will now pass the call onto Steve Lasota, who will give you an update on our financial performance.

Thank you, Jeff. During the second quarter of 2013, we reported GAAP net income of $1.1 million or $0.01 per share compared to a GAAP net loss of $7.9 million or $0.07 per share in the prior-year period. In addition to our GAAP results, management utilizes non-GAAP measures, what we term as economic income, to analyze our core operating segments' performance. We believe economic income provides a more accurate view of the operating businesses by excluding the impact of expenses associated with one-time equity awards made in connection with the November 2009 Ramius-Cowen transaction. In 2013, we no longer have these expenses. Certain other acquisition-related expenses and other reorganization charges, goodwill impairment and economic income also excludes the impact of accounting rules that require us to consolidate certain of our funds.

For the three months ended June 30, the Company reported an economic income of $1.5 million, or $0.01 per share compared to an economic loss of $6 million or $0.05 per share in the 2012 second quarter. Second-quarter economic income revenues were $81.1 million, an increase of $14.9 million compared to $66.2 million in 2012's second quarter. The increase in revenue was primarily attributable to an increase in investment banking, brokerage and incentive income partially offset by a decrease in investment income. We generated $3.6 million of investment income during the second quarter. We ended the quarter with $405 million in invested capital.

On the alternative investment side of our business, we recorded management fees of $14.6 million during the second quarter, which is unchanged from prior-year period. Incentive income increased to $3.8 million from incentive fee income of $2.6 million in the comparable prior-year period.

In our Broker-Dealer segment, second-quarter investment banking revenues were $25.6 million, an increase of 57% compared to $16.3 million in the prior-year period. We completed a total of 24 transactions across all products in the most recent quarter compared to 17 transactions in the second quarter of 2012. Brokerage revenue was $33.3 million in the second quarter, an increase of 36% or $8.7 million over the prior-year period. The increase in the current quarter was primarily due to an increase in commissions earned related to the Cowen's electronic trading and cash equities business. The increase in commission is partially to be able to an increase in the number of stocks covered as a result of the acquisition of Dahlman Rose.

In the second quarter, we reported compensation and benefits expense of $47.7 million, a 15% increase compared to $41.6 million in the second quarter of 2012. The increase was primarily attributable to an increase in headcount due to the acquisition of Dahlman Rose.

For the quarter, we reported an aggregate compensation to revenue ratio of 59% compared to 63% in the second quarter of 2012. In the quarter, we incurred $1.3 million in compensation expenses for activities in which the Company gets reimbursed.

Moving to our non-comp expenses, fixed non-comp expenses in the current quarter decreased by 3% to $23.8 million as compared to $24.5 million in the comparable prior-year quarter. This was primarily due to reduction in professional advisory fees and IT-related services. The decrease was partially offset by an increase in depreciation and amortization costs and occupancy and equipment costs related to the Dahlman Rose acquisition as well as the KDC acquisition in the fourth quarter.

Variable non-comp expenses were $8.6 million in the second quarter of 2013, up 20% compared to $7.1 million in the second quarter of 2012. This is due to an increase in floor brokerage and trade execution costs related to two acquisitions completed during the second and fourth quarter of 2012 and one in the first quarter of 2013, which generated increased trading costs and is in line with the increase in associated revenues. Marketing and business development expenses were also higher in the quarter due to increased marketing activity firm-wide.

While economic income is a pretax measure, I would like to briefly touch on our tax situation. After the acquisition of LaBranche, Cowen has significant operating losses or NOLs in the US to carry forward into the future of $366 million. The associated gross deferred asset currently amounts to $147 million. There's a 100% evaluation allowance against that, but it is of significant value to the firm. IRS rules associated with the acquisition of Cowen and Company in 2009 and LaBranche in 2011 partially limit the amount of NOLs the Company will be able to utilize annually, but significant amount of future earnings will be shielded from taxes by this asset.

Turning to our balance sheet, our stockholders equity amounted to $506 million at June 30 and our book value per share was $4.29. Tangible book value per share, which is a non-GAAP measure, was $3.87 per share compared to $4.04 per share at the end of 2012.

Finally, moving to our share repurchase program, in the first quarter we repurchased approximately 833,000 shares, a result of net share settlement related to the vesting of equity awards. We did not repurchase any shares in open market. The total cost of the program in this quarter was $2.6 million or $2.98 per share. Since we announced our original repurchase program in July of 2011, we have repurchased 8.2 million shares in the open market and an additional 3.9 million shares as a result of share net settlement related to the vesting of equity awards. The total cost of the program through the second quarter of 2013 was $33.6 million, which represents an average price of $2.78 per share. As of June 30, we have approximately $12.2 million remaining under the current program.

I will now turn the call back to Peter for closing remarks.

Thanks, Steve, Jeff, Michael. Generally, that's kind of it. Why don't we just open it up for questions at this point.

(Operator instructions) Joel Jeffrey, KBW.

Jeff, I just wanted to go back to a comment you made on DCM activity. I think you said it could be lumpy going forward. Did you guys see any kind of pool forward in terms of deal activity because of rates going up and how should we think about this going forward?

No, I don't the quick saw it pull forward. These are just there -- they take a fairly long time to execute from start to finish in terms of -- and they tend to be bigger fees. So when we -- it sometimes happens at the end of a quarter; it could end up in one quarter or another quarter. But there has been no pull forward in terms of activity. Nobody, at least as far as I can see in our backlog, has rushed in here that would not have already been doing it anyway. I think from our standpoint, the rate backup is certainly something that we are talking about with clients, but we are really talking about a part of the marketplace that is less rate-sensitive and more focused on growth equity and using debt -- or growth financing and using debt as an alternative to maybe do an equity financing. So not really seeing any change in activity because of the backup in rates.

Okay, great. And then thinking about the investment banking and the equities business, can you give us a sense for how much of the business in the quarter was contributed by the Dahlman acquisition and maybe how much was from electronic trading?

We don't break those numbers out, Joel, and it's hard to say. What I can say is a couple things. It's hard to say how much of it is a result of Dahlman activity because clients are paying you, they are paying you across all of the different industries. It's very difficult to track which trades from which clients go to which sectors.

What we can say is that we are seeing meaningful increase in the votes that we are getting. The early votes that we have gotten back suggest we have moved forward quite a few notches by adding the content from Dahlman. And that clients -- we have noticed an increase in the overall trend we have done with clients quarter over quarter.

So that suggests that they have more room to pay us because we are providing them with more high-quality content. It's hard to track specifically how much of that is Dahlman-related and how much of that is Cowen-related. But what I can say is that 40% of the research being published, 40% of the research analysts weren't here a year ago, and so we are still working feverishly here to make sure that we get them up and on the vote. I think we did more travel in the second quarter than we -- well, certainly more travel in terms of research visits and client visits in the first six months than we did in the entire year last year, so it gives you an indication as to the volume and the quality of those reports. So we expect to see some increase significantly, both because of the Dahlman acquisition as well as the efforts we made internally.

On the second question, the acquisition has actually proven to be quite successful. We are seeing much more flow through the electronic market than ATM was seeing on its own. Clients are turning us on. What we look at internally here is how many new clients are we adding, and then how many clients did we add that begin to use the product, how many are active. Those numbers have increased nicely over the course of the past year.

If you look at Traders magazine, for example, over the last month we have been developing some interesting technology that's really innovative. Our market positioning really is much more to be broker-neutral since we don't do dark pools. And if you are on the buy side desk, you really need to be thinking about how you're going to access all 52 venues. You want to do it with somebody who doesn't have an axe to grind and can find you the best liquidity without conflict. That's the product that we have, and certainly we are seeing from clients a significant response to that.

Okay, great. Thinking about the investment income, given the assets that you guys have invested and the historical returns, is a good way to think about this a $40 million to $50 million typical run rate in terms of revenue?

It has kind of worked out to be that. Our internal rate of return on our invested capital has run somewhere between 16% and 17% fairly consistently for a very long period of time. We actually were on track towards that number. June was an interruption and what happened in the bond market, the equity markets resulted in our giving back some income that we had made in April and May. And I think July, we are back to sort of earning that -- getting back on that track, let's put it that way.

So I think if you think about that kind of return on our invested capital, on the liquid portion of our invested capital, that would be a good way to look at it. The liquid portion.

Okay.

I mean, because some of the older private stuff that will be maturing over the next few years is lumpy, so we will have some quarters are better and some quarters worse. We are migrating towards a more liquid balance sheet, in general. That's our objective, to deploy more of our capital in the asset management business to see some of the new product and to take advantage of some of the capability that we have put in place over the last few years.

That was actually a pretty good segue into my next question, which is where are you seeing the best opportunity to invest the firm's capital.

Well, look, we have had a great run in credit for the last few years. We don't see that quite as -- quite the opportunity now that we did then. Merger ARB has -- an event, has been a productive space for us and we continue to press, and when I say press, meaning allocate capital in that space. Our healthcare royalties business has been a great place to have capital. The income on the royalties business, though, is very, very back-ended, so it's not showing through. But based on what we see, we think it's a place we would like to have more capital over time.

And, other than that, we are just being very, very careful right now as to where we allocate capital, less going into less liquid assets, because now that we are a public company we don't have the luxury of taking a very, very long-term view on some of our real estate investments.

Okay, great. Lastly for me, the quarter-on-quarter increase in the shares outstanding -- what drove that?

It was a vesting in the second quarter of shares that had been granted for compensation purposes in prior years.

Okay, and should we expect similar increases on a quarterly go-forward basis, or was this more of a one-time -- ?

No, it's usually -- the way the vesting works, it's usually in the second quarter of each year. So you won't see it in the third and fourth quarter.

Yes, and since we knew we were going to buy back stock through providing the net settlement for those people vesting, we were pretty much out of the market on -- in our buyback during the quarter. Now that the second quarter is out, the window will open Monday for us. We don't have any vestings coming up of any consequence, so we will probably be carefully in the market looking at acquiring stock opportunistically.

Great, thanks for taking all my questions.

Keith [Gottesman], Krieger Capital.

You essentially last answered my question with the last gentleman. I just wanted -- on the $3.6 million of investment income, what percent return did that represent? Is that against the $400 million of liquid invested capital?

Yes, well $400 million is invested capital. Of that, $200 million we deemed highly liquid, and then the other $200 million is moderately illiquid or illiquid. We have a very big stake in our historical real estate assets and our real estate funds. That stuff will be liquefying. So you really have to think about it in terms of the $200 million-ish of liquid assets. And you can just figure it out yourself.

Right, right, right. And against that, you said you are looking at the IRRs, what did you say, 16% to 17% over (multiple speakers)?

Well, that's what it has been historically --

Historically (multiple speakers) that's historical; I got you.

Yes, for about 18 years now.

Got it, thanks guys.

Mark Lane, William Blair.

On the broker-dealer side, good revenue quarter; seems like decent momentum; business is still unprofitable, though. So what is the path towards profitability? You talked about all these opportunities to take expense out of the business. What is the path?

Well, I think, first of all, we see significant opportunity for revenue growth just based on the fact that we are one quarter into the Dahlman acquisition and there's a number of areas in terms of banking and in the equities division that we haven't seen the benefit of plugging in.

So I think when I look at the path to profitability, for us it is being able to leverage the fixed cost structure. We will continue to look at ways to eliminate the fixed cost structure. Certainly, the fact that we brought fixed non-comps down in a quarter which we did an acquisition of another firm should give you an idea of how successful that effort is. So we have had zero change in fixed costs year-over-year, yet we acquired another firm of significant size at significant cost. So some of that will continue to show through, but I think that the real opportunity in the broker-dealer here is to continue to drive revenue, and we expect to see that over the course of the back half of the year, market conditions notwithstanding.

But can you take out more of fixed non-comp expense in the second half, or is this, as you just described, completely a revenue story?

Well, I think we can always do better. I'm not expecting there to be significant improvement in fixed non-comps. Like I said, we did a remarkable job in a very short time of merging two firms together and taking out more than 100% of the cost of the combined firms. That's pretty remarkable. And to be able to do that in a single quarter I think a pretty good track record. Obviously, we will continue to look for ways to bring fixed costs into line, but I'm not expecting there to be a significant reduction in fixed costs.

I think the biggest challenge we have is long-term real estate and the leases. Over the next couple of years, as we migrate out of some of the higher-cost space that we had in the various locations, that will run down over time. We know that that is embedded gains, but you are not going to see that in a quarter-over-quarter basis. That's something that we are just working on reducing over the long haul. Obviously, anything we can do when vendor contracts come up to drive down pricing based on the new realities of the world, we are doing that.

So I think the team has done an exceptional job, and I really -- I have no complaints about it. These guys have done a great job and will continue to look for ways. But it's really about leveraging the fixed cost structure on the revenue side at this point.

Okay, how about on the comp side? The segment detail hasn't been disclosed yet, but you are probably still in the Broker-Dealer segment north of a 60% comp ratio. What's -- in a business where it's difficult to forecast revenue, what is your longer-term goal in terms of that comp ratio?

So, we obviously look at compensation across the entire platform and we pick and choose the areas where we want to make investments in businesses we think will be long-term successful. The good news is that it's largely variable at this point. We've made some significant investments over the course of the past few years in personnel. The real risk in that business is when you make investments in people and it takes some time to get up and running, you have a revenue mismatch relative to the compensation for those people.

So during the rebuild process, you are always paying forward and expecting to get our part of the ROI on those investments on the back end. I would say that the hires we did in banking and capital markets in 2010 and 2011 where we made significant investments and didn't have the revenue really to pay for it are starting to come home, and that has been great. You can see real revenue contributions from the investments we made during those years. And in spots where that is not happening, we are moving on and repositioning and doing the right things to really drive the business.

The good news is, at this point, it's largely variable in nature so, as we produce more revenue, we will be able to pay more, and that's a good feeling.

So last question, back to the share repurchase program -- so we have had this consistent debate about use of the balance sheet. You have significant, significant excess capital. Your stock is trading well under tangible book. Investment income results have been volatile. You look back over the last 2 to 3 years, you are issuing stock to your employees at tangible book, you are diluting current shareholders. At the very least, why can't you draw a line in the sand and say, hey, we are not going to let the diluted share count increase at all?

Because we are running the business for the long term, not for the short term. And as we do, we look at our liquidity, we look at our investment for, growing the business, and we look at our cash needs on a rolling forward 30-month time frame all the time and we will continue to buy stock back as we feel that we can do that without impairing where we want to take the business over the next 2 to 3 years, and our cash needs to do that.

And we have this debate, and I think that where you and I are quite different is that having liquid capital and a lot of it is the greatest safety valve in this business and allows us to be opportunistic like a Dahlman Rose, like the electronic trading business that we bought and five other things that we are looking at right now that we can look at because we've got the capital. And it's going to stay that way.

To echo that, Mark, very specifically, it's hard to look out on a quarter-over-quarter basis. When we think about our capital base and we think about our ability to attract and retain talent, both asset management business and the broker-dealer, the fact that we have a balance sheet that is easy for people to understand gives them a very real sense that we are going to be around for a very long time. In a world in which we have seen our competition get crushed because they don't have the financial wherewithal to withstand downturns, it is a great marketing tool for us and we are able to do things that other people can't because the question of -- the existential questions do not come up with us. And that is a very key piece.

Having said that, we will continue to look at it. We are all shareholders here and we will do the right things to drive value and to drive book value, certainly book value per share. But it's a marathon, not a sprint, so we are not going to do anything that puts us in a position where we can continue to grow the business.

Okay, thanks.

Thank you, you have no questions at this time. (Operator instructions).

Alright, then. Thank you all for attending the call today. I look forward to speaking to you in October. Everybody have a very happy, healthy August, enjoy the summer; it's going to end soon enough and, you know, we'll go back to the coal mine. Operator, thank you.

Thank you. Ladies and gentlemen, that now concludes your conference. You may now disconnect. Have a great day.