Evercore Inc (EVR) 2014 Q3 法說會逐字稿

Welcome to the Evercore third quarter 2014 financial results conference call. During today's presentation, all parties will be in listen-only mode. Following the presentation, the conference call will be open for questions.

(Operator Instructions)

This conference call is being recorded today, Wednesday, October 22, 2014. I would now like to turn the conference call over to your host, Evercore's Chief Financial Officer, Bob Walsh. Please go ahead, sir.

Thank you. Good morning and thank you for joining us today for Evercore's third quarter 2014 financial results conference call. I'm Bob Walsh, Evercore's Chief Financial Officer.

Joining me on the call today are Ralph Schlosstein, President and Chief Executive Officer; and Roger Altman, our Chairman. After our prepared remarks, we will open up the call for questions. Earlier today, we issued a press release announcing Evercore's third quarter 2014 financial results.

The Company's presentation today is complementary to that press release, which is available on our website at evercore.com. This conference call is being webcast live on the Investor Relations section of the website, and an archive of it will be available beginning approximately one hour after the conclusion of this call for 30 days.

I want to point out that during the course of this conference call, we may make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties and there are important factors that could cause actual outcomes to differ materially than those indicated in these statements.

These factors include, but are not limited to those discussed in Evercore's filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. I want to remind you that the Company assumes no duty to update any forward-looking statements.

In our presentation today, unless otherwise indicated, we will be discussing adjusted pro forma or non-GAAP financial measures that we believe are meaningful when evaluating the Company's performance. For detailed disclosures on these measures and their GAAP reconciliations, refer to the financial data contained within our press release, which as previously mentioned, is posted on our website.

We will refrain from repeating the information included in the press release, focusing instead on the key opportunities, challenges and changes in our business. We continue to believe that it is important to evaluate Evercore's performance on an annual basis, as we've noted previously our results for any particular quarter are influenced by the timing of transaction closings. I'll now turn the call over to Ralph.

Thank you, Bob, and good morning, everyone. We're pleased with our third quarter operating results, as we generated record quarterly revenues and the best third quarter revenues and earnings in our history. Our results for the first nine months of the year also are a record.

The third quarter was a very active quarter for Evercore. We continued to benefit from the improving market environment, as M&A activity was significantly higher than 2013, causing our risk and unrisk backlogs to continue to be strong.

Productivity improved, as revenue per advisory, senior managing director, was $10.1 million on a trailing 12-months basis, reflecting both higher levels of activity and the contribution of advisory SMDs recruited in 2013. Our capital markets advisory initiatives continued to gain traction as we participated in two landmark IPOs, the largest IPO in history, Alibaba, and the largest US banking IPO, Citizens Financial.

We announced the addition of two new senior managing directors in our Advisory business. Mark Hanson who joined our Healthcare Practice from Barclays. And Greg Lee, who joined our Tech & Telecom practice. Greg formerly was a partner of Goldman Sachs. And we announced our plan to acquire ISI, which I will provide an update on later in this call.

We continued to utilize our earnings to return meaningful capital to our shareholders. We repurchased 843,000 shares in the quarter, increasing our year-to-date total share repurchases to nearly 2.6 million shares, more than offsetting the dilutive effect of bonus and new hire equity awards for the year.

In fact, over the past five years, we have offset more than 100% of the dilution caused by both bonus and new hire equity awards through share repurchases. As outlined in our earnings estimate or our earnings release, our Board has approved a $0.03 per share increase to our quarterly dividend, which will now be $0.28 a share.

Finally, our Board increased the aggregate value of our current share buyback program to $350 million, or the repurchase of an aggregate seven million shares. This will provide the additional capacity needed to repurchase shares associated with the ISI acquisition over the next several years.

Let me quickly go over the numbers. First, the third quarter. We recorded record third quarter net revenues of $225 million, up 21% from the same period last year, and up 3% from last quarter.

Net income was $33 million for the quarter, with earnings per share of $0.71. These results are up 35% from the prior year and 7% in comparison to the second quarter of this year. Operating margins were nearly 23% for the quarter, and a compensation ratio was 60.5%.

As anticipated, commission revenues in our Institutional Equities business softened a bit after we announced our intention to acquire ISI. As a result, our Institutional Equities business reported a loss, which was a drag on operating margins and increased our compensation ratio.

If we exclude the Institutional Equities business from our third quarter results, our investment banking revenues would have increased by 24% in comparison with last year, instead of the 21% as reported in our adjusted pro forma financials.

Our net income would have increased by more than 43% in comparison with last year to nearly $35 million rather than the 35% increase we reported. Our EPS would have been $0.74 rather than $0.71. Our operating margins would have been 26.3% rather than 23%. And our compensation ratio would have been 57.4% instead of 60.5%.

Now for the year-to-date results. Our revenues for the first nine months of 2014 were $591 million, up 8% from the first nine months of last year. Net income was $78.4 million for the first nine months, up 11% compared to the same period in 2013.

And operating margins were 21.9% for the first nine months compared to 22.6% for the first nine months last year. Our compensation ratio was 59.4% compared to 59.3% last year. And non-comp costs were 18.7% of revenues compared to 18.1% last year.

If we remove the Institutional Equity business from the nine-month numbers, our EPS would have been $0.07 higher, our compensation ratio would have been 57%, and our operating margins would have been 24.7%. Let me now turn the call over to Roger who will discuss our advisory results and the general M&A environment.

Good morning, everyone. In talking about our results, I'm going to pick up where Ralph just left off and reflect those excluding our equities business because while it's not true from an accounting point of view as a business matter, it's essentially a discontinued business in light of the ISI acquisition.

So we had record third quarter investment banking revenue of $190 million on that basis. That was up from $161 million a year ago and $188 million in the second quarter. As Ralph said, it's our best third quarter -- best quarter, rather, ever. We had record pre-tax income of $52 million, up from $37 million a year ago and $44.5 million last quarter.

We had $188 million of advisory fees. A little over three-quarters of those were US generated. We had 50 fees greater than $1 million in each case; that compares to 31 such fees a year ago and 40 such fees last quarter. And for the nine months, we had 117 such fees as compared to 95 a year ago.

We generated $25 million in fees related to our Capital Markets Advisory businesses. 23 separate transactions. So that $25 million in revenue obviously is a way from our original businesses of M&A Advisory and Restructuring Advisory.

I do have a decent graph, it looks like a graph of second grade arithmetic, so that's $100 million at an annualized rate. I don't know if we'll generate that or not, but it's a rather strong statement on the broader platform that Evercore now has.

Those fees, by the way, are beyond underwriting revenue. That's just advisory fees on the capital market side, which are -- and the underwriting revenue represented another $5.5 million.

We had total fee paying clients in the quarter of 162. That's up from 136 a year ago and 150 last quarter. Ralph already referred to our productivity average revenue per SMD, $10.1 million.

Same as last quarter, essentially the same as a year ago. And that's a figure which we pay a lot of attention to, and this is right in line with Evercore's very long-term historical productivity.

Our backlog remains strong. And in terms of the environment, the data is interesting and a little bit unusual. Global announced M&A volume for the first nine months in dollar terms is up strongly, 59% year-over-year increase in announced dollar amount.

That's a big change. It happens that in the past quarter, the total actually was down. But the more relevant trends in this category are always longer term ones. And quarter-to-quarter trends, I don't think are terribly meaningless -- meaningful, rather.

So, strongly up on the dollar basis. And the total announced volume for the nine months was the biggest since before the 2008 credit market collapse. In fact, the second quarter, not this past one but the one before, was the biggest single quarter around the world in many, many years.

Over these nine months, the United States was the strongest market, up 64% year over year, And accounting for about half of the total global volume. And showing the disparate trends within these global totals, for the third quarter, North American announced M&A was the biggest quarter since before the 2008 crisis. And that's also true for the US alone, where Europe and Asia were both down for this past quarter.

I think the main point here other than totals is that all of these increases have occurred in the category of larger transactions, deals of $5 billion or above. That's where the increase in total dollar volume has occurred. And that becomes clear when you look at the total number of transactions, not the dollar amounts but the number of transactions.

Because on that basis for the nine months, they're up 2%. In the US, the total was up 5%, but the globally 2%. Parenthetically, global completed deals in total dollars were up 6% year over year; in the US, they were up 64%.

One footnote, I would remind everybody that when you look at announced deals per advisor and you compare firms based on how many deals they're aligned with on an announced basis, keep in mind that those totals are always incomplete because many deals are not disclosed or alternatively, the advisors on those deals are not disclosed. And that's not really the best way to look at who is doing what business.

Finally, in terms of our headcount, total bankers at end of the quarter were 608, up 25 compared to the end of the second quarter. We had 67 senior managing directors at the end of the third quarter, up three, reflecting the additions of Stu Francis and Don Monson in Silicon Valley and as Ralph said, Greg Lee in Media and Entertainment.

And so we've added our usual contingent of new SMDs for 2014, right in line with our historical trend of doing so. I don't see any reason why that won't continue for the foreseeable future on the same steady basis we've been doing it. Ralph, back to you.

Thanks, Roger. Let me briefly just talk about our Institutional Equities business. As I indicated earlier, we generated $8.2 million of revenues in that business, as commission revenue softened following the announcement of our plan to acquire ISI.

Expenses were $13.8 million for the quarter, up by 9% versus the prior quarter. And the business reduced our quarterly EPS by about $0.03 a share in the third quarter.

In our Investment Management business, assets under management were $14.5 billion, essentially flat from last quarter. Investment performance was consistent with our benchmarks for most of our investment products.

In the first nine months of the year, net revenues were $77.5 million, up 5% from last year. Operating income for the first nine months was $14 million, up 19% from last year, and operating margins were 18.1%.

Operating income for the Investment Management business for the third quarter was $3.9 million on net revenues of $26.2 million. Operating margins in the third quarter were 14.8%.

Let me now give you a brief update on the ISI acquisition. First, the ISI team and our team are working hard in preparation for closing and the launch of our combined business.

We continue to expect that this will occur in this quarter and hopefully in the next few weeks, subject to regulatory approval in the US and the UK. We have had great success in retaining from both ISI and our legacy business, virtually all of the research professionals and distribution professionals we have sought to retain, having lost only one research analyst on the macro side of the business who we had hoped to keep.

Third, as you all know, the Institutional Investor Research Rankings were released earlier this month. ISI had an overall ranking of number five, up from number 10 in 2013 and 2012. It is the first year that an independent firm has been in the top five since DLJ had that position in 2000.

And ISI had the second largest number of number one ranked analysts after JPMorgan and had the highest percentage of analysts ranked number one in this case, ahead of JPMorgan. After an initial fall-off in revenues at ISI following the announcement of the transaction, ISI had record revenues in September and seems on path for record revenues in October as well.

While we certainly are not able to forecast revenues and profits for next year, based on everything we know today, we remain optimistic that we will achieve the targets that we laid out when we announced this acquisition.

And that is we will make progress in controlling non-comp expenses through the course of next year. That our compensation ratio will be consistent with the target of 55% compensation ratio, which is part of our purchase agreement and that our operating margins in the secondary business alone, without ECM revenues, should reach the mid-teens next year and including ECM, should be higher than that.

So from everything we have seen today, we continue to expect this transaction to be modestly accretive to earnings per share in 2015 and meaningfully accretive in 2016, once some of the revenue synergies and the reductions in non-comp expense are more fully in effect.

And early indications are that the ISI acquisition also will have a positive effect on the growth rate of our advisory business by increasing our ECM revenues and by helping us continue to recruit top investment banking talent. So still early days, but very much on track. Bob will now give you some further comments on our non-comp costs and other financial matters.

Thank you, Ralph. You'll note in the earnings release that our adjusted results for the third quarter exclude certain costs that are directly related to our Institutional Equities business and the acquisition of ISI. Specifically in our US GAAP results, we have reported $3.7 million in special charges, principally related to severance arrangements, facilities-related write-offs, and $4.1 million in acquisition and transition costs, principally relating to professional fees associated with the acquisition.

We excluded the acquisition and transition costs in this quarter given the size of the transaction in comparison with any prior acquisitions we have made. Our core non-compensation costs were essentially flat in Q3 in comparison to the prior quarter. Our cost per person for the 12 months ended September 2014 were approximately $129,000 per person, which is up slightly from prior periods.

With respect to taxes, our adjusted pro forma tax rate for the first nine months is 37.2% compared to 38% for 2013. Our tax rate increased slightly in the third quarter, reflecting the losses from the institutional equities business, as we have indicated before changes in the effective tax rate are principally driven by the level of earnings in businesses with minority owners and earnings generated outside of the United States.

Moving on, our share count for adjusted earnings per share was 46.7 million shares, a decrease of approximately 200,000 shares for Q3 -- or from Q2. This decrease reflects the affect of our share repurchase activity. The normal increase in shares due to vesting over time and the effect that a changing share price has on both the Mizuho warrants and unvested RSUs. Our average share price for the quarter was $51.80.

And finally, our cash position remains strong as we hold $270 million of cash and marketable securities with current assets exceeding current liabilities by approximately $264 million. So with that, operator, if you would open the line for questions, please.

Thank you, sir. We will now begin the question-and-answer session.

(Operator Instructions)

Our first question comes from the line of Alex Blostein with Goldman Sachs. Your line is open.

Hey, guys. Good morning.

Good morning.

So first question around the ESM opportunity given the transaction. Now that you guys had a little more time to spend with the team, your bankers and as well as the corporate clients, maybe give us some sense of what you guys think the opportunity could be for you.

And I understand that I'm not asking you to put a revenue number obviously out there, but maybe in terms of potential clients that you could have done business with over the last 12 months or so but couldn't because of obviously a lack of distribution research capabilities versus now that potential could be on the table.

So, first of all, we're not closed yet. So we're two separate businesses and we can't operate as if we weren't. So the interactions that we've had to date have been principally getting to know and social in their nature. But I would say that those interactions are encouraging.

It's Roger. As somebody who is in the field a lot, it's impossible to know whether you would have done business six months ago or a year ago with X, or Y or Z if you had this and that capability. That's impossible to know.

But we wouldn't be doing this if we didn't think it was going to be synergistic and accelerate our growth rate. We thought a lot about that.

And we've been -- we did -- if you want to talk history, we did $6 million of underwriting revenues in 2012. We did $25 million last year. We expect to do as well or better this year.

And this transaction, over time, should lift that pretty significantly, both by expanding the range of transactions that we could be involved in because we have much broader research coverage, and because we have a much larger distribution organization, it should increase, over time, our participation in the transactions in which we're involved.

Got it. Makes sense. And then shifting gears to the M&A backdrop, I heard your comments on risked/unrisked backlog. Still sounds like pretty strong levels.

But I was hoping maybe you could opine on the recent volatility we've seen on the macro front, clearly softer data out of Europe. And whether or not you guys have noticed any sort of pause in the M&A deal appetite from the corporates.

Yes. The answer to that is so far, no, we have not. And I don't think the volatility and the turbulence of the past seven to ten days has yet deepened to a level that would interrupt those trends that are causing this improved environment, at least in the large deal category. But, of course, none of us knows what global financial markets will bring five minutes from now. But so far, no.

All right. Fair enough. Thanks, guys.

Thank you.

Our next question comes from the line of Vincent Hung with Autonomous. Your line is open.

Hi. Good morning. Just a few questions. First one is, can you tell us the announced -- the impact of announcement fees this quarter versus the prior quarters?

Vincent, it's Bob. We've never broken out the different components of our fees, as you know. Success fees are the most significant driver of our results. And as Roger, I think, indicated in his remarks, we are in 50 fees in excess of $1 million which drives the strength of this quarter.

Some number of those are announcement. Most of those are success. But we don't really focus on the different character and report it externally.

Okay. And, Bob, you've previously given an estimate of what you think the revenue attribution could be in the Evercore's Equities business. Given the weakness we saw in the third quarter, would you look to revise this estimate?

Vincent, I don't think we've given any estimate on what the attrition would be. I know a number of you sort of speculated that it would be significant. I think importantly, as Ralph noted, the ISI franchise, which is much larger, has done quite well post-announcement.

Yes. And if I could say so, it's Roger, and I'm just speaking for myself here. Ralph can provide a different view. We, ourselves, are not paying much attention to the disruption in our existing equities business because we're on the verge of closing ISI and our equity business is going to be much bigger and more prosperous.

So to be really honest, we care a lot about the people in that division. But in terms of your question, what difference does it make. It doesn't make any difference. I mean, we're basically talking about a couple million dollars.

Well, and also next year, we're going to have a much bigger, more (multiple speakers) equities business. So it's kind of an irrelevant diversion.

Okay. Then the last question is I know you won't comment on specific deals. But when you have a deal where you're advising a target on a take care defense, you agree to sell, and then it falls through, do you guys just get the announcement fees?

Listen, again, we don't break out what our composition of fees are, and it's somebody who has been doing this a very long time. Every single situation is different. And your compensation in every situation is different.

In some cases if a deal doesn't happen, you still get compensated pretty well, depending on the evolution of the deal. In other cases, you don't get compensated at all. And there's no particular pattern. So that's all we can say about it.

Okay. Thanks.

Our next question comes from the line of Brennan Hawken with UBS. Your line is open.

Good morning, guys.

Good morning.

So quick question here. You guys talked about non-comp expenses in ISI and the fact that you wanted to try to bring that down. Can you give us a sense -- I should say is it your expectation that reducing client-oriented spend in that business is going to have any kind of impact on revenue --

No.

And what you think that might be?

No. Basically the reductions are -- first of all, there's just some bird's nest on the ground redundancies, two fixed connections, redundant information and data systems, et cetera. So that's very easy. It has no effect on anybody.

Then there are certain policies relating to travel, entertainment, et cetera. Last time I checked, an institutional investor doesn't really care whether you flew from New York to Kansas City in first class or coach.

So, I don't expect that those will have a particular effect on revenues either. So we're highly cognizant of things that touch the client and are going to be very careful and protective of those.

Okay. That's helpful. Thanks. And are there any plans for cost cuts in the legacy Evercore business beyond what we reported today or what you reported today, or is -- should we think about this as the right sort of jumping off level from here?

I think as a general matter, we made the decision as we've gone through the integration to be a little less stringent on the headcount at the outset. And we're watching that extremely carefully.

And there -- we have an agreement among all of us that we will monitor that very carefully in the first two or three months of our joint operation. And if the -- and this has been primarily on the distribution side of the business. We have a lot of clients and we have a lot of research product that's being added to the platform.

So we made a judgment to error if we are erring a teeny bit on the side of maintaining a little bit more distribution than we thought at the outset. That can obviously be a good thing if revenues are consistent with that level of staffing. And if they're not, we'll adjust it. It's that simple.

That's helpful, Ralph, thanks. And then I know that senior management is often really critical in hiring and bringing in bankers, recruiting bankers. Do you guys think that next year, given the focus that's going to have to be brought on integrating ISI and working out all of those subsequent questions, distribution and the like that we just went through might cause the MD hiring in 2016 to be lower than your typical run rate? Do you have any reason to believe that?

No.

Absolutely not, no. You know, Evercore has a -- I have to give Ralph a lot of credit on this. He's really good at it. Evercore has a very meticulous, systematic approach to SMD recruiting.

If you look back at how many new SMDs we've added over the past four, six, eight years, you can see how steady that has been. The system is in place and the amounts of time Ralph spends on it, a lot of other people including me spend on it, is essentially fixed. Because it's the -- it's like planning your fields. You have to do it or you won't have a harvest or -- and you won't have growth.

So the answer is a resounding no. Just to give you a tiny piece of color, tomorrow afternoon, Roger and I are sitting down with our -- with the external people that we use to help us with this and we're laying out the entire plan for next year and we've already made some progress on it.

All right. Great. That's all very helpful. And then last one, of the revenues, the trailing 12-months revenues from ISI, what portion of those are from macro or macro-related or tied to the macro team? Do you have a sense of that?

I think we do have a little bit of a sense of that, and I think we'll have to make a decision once we're one firm, the granularity that we want to disclose with respect to our -- the specific revenues associated with specific research products and next quarter, I think we'll have an answer to that.

All right. I guess I'll wait until next quarter. Thanks, guys.

Thank you.

Our next question comes from the line of Devin Ryan with JMP Securities. Your line is open.

Thanks. Good morning, gentleman.

Good morning.

Maybe just coming back to the Shire AbbVie deal, which now is formally off. You don't have to speak to that but just inversions, clearly, represent a small percentage of overall deals. But is the broader scheme of government going out of its way to stop certain type of transactions concerning to your clients? Are you hearing that meaning a sentiment changed it all around the willingness to move forward on some other type of large transaction and are you seeing any other ripple through the broader M&A markets as a result?

Let me kind of try to unpack your question. If I understand it, my answer would be no, because I interpret the question to mean has the turbulence, so to speak, over inversions impacted the broader deal environment and the outlook for deals for the rest of the year? If that's the correct interpretation of your question, I think the answer is no.

Yes, that's it.

No. Okay. That's good enough. And with respect to ISI, one potential risk that, at least I've heard, is that the business actually hits its targets over the next five years but they do so by running maybe what you would call artificially low comp ratios because essentially the upside from the earn-out is much greater longer term.

So essentially all of the shares vest but the earnings run rate, after five years, is not as sustainable as maybe it looked in the five years preceding. So I just wanted to get your thought on that. Is that just a risk that is not reasonable or is there any way to protect against that if, in fact, that could happen? I would say it's an unreasonable -- or it's a silly assumption to be honest. When we are looking at our planning in terms of what the comp ratio will be, we are assuming that comp is, as it has been historically, both for the legacy ISI people and for the legacy EVR -- Evercore people. And, in fact, we're probably assuming some amount of upward drift consistent with growth in revenues.

In anything that we do, we are always cognizant of adjusting compensation, upward or downward, to be what is the market level of compensation for someone of comparable talent and skill. Because if that person isn't there, we need to replace them and we want to be able to do that without any impact on our earnings. So you should assume that in 2015 and beyond, everyone in this business will be paid a market rate.

Got it. Thanks for all that color. And then just lastly within asset management, the earnings profile there continues to improve. You've had some really nice progress but you haven't done any deals there, I guess, more recently.

Are you content with where that business is now relative to the rest of the firm and kind of how it's growing relative to the rest of the firm, or should we maybe look at the low -- slower expansion more recently as more just a reflection of how you guys view the current opportunities and our business for the market?

I think -- I've said this a fair number of times over the last couple of years. Any business should be looking to deploy its capital and deploy its effort, time, in our case, on businesses where we have a true competitive advantage and where we have significant growth opportunities.

For us, the most obvious and consequential of those are in the investment banking business. And as you can see, we have done a pretty good job of investing in that business, maintaining very strong operating results while we are making investments.

So I would say we clearly have been -- I don't know if the word would be singularly, but it's certainly close to singularly focused on taking advantage of the very consequential opportunities that we believe that we have in our Advisory business and now in the Equity business as well.

The Money Management business, particularly wealth management, will continue to grow organically. We're pleased with those businesses. But as I've said before, in terms of making additional acquisitions, the only thing that we've looked at in the last couple years are sort of tuck in, lift out type of things that would be added to our wealth management business.

Great. Thanks for the update. And congratulations on the nice quarter.

Thank you.

Thank you.

Our next question comes from the line of Douglas Sipkin with Susquehanna. Your line is open.

Thank you. Good morning, guys.

Good morning.

Two questions. One, on M&A and then balance sheets. First with respect to M&A, given you guys maintain a real leadership position in energy, I'm just curious for your perspective. The recent decline in the price of oil, do you guys see that as being positive for energy-related advisory fees, negative or too hard to call?

Too hard to call. Seriously. The -- we've been talking about that a lot. But there are so many cross currents that it's just too difficult to know, including, of course, where prices go. The most basic of all. So it's just too difficult to know.

This is a very good year generally in energy-related transactions around the world and for Evercore. And so far we haven't seen any changes in that environment, as I said, to a broader question earlier. But it's just too hard to know.

Okay, great. That's helpful. And then a question maybe for Bob around the balance sheet. The buy back is great. I'm just wondering given all of the news releases last quarter with ISI and everything, were there more black-out windows for you guys or were you pretty much free to buy back along the same patterns you have every quarter? I'm just wondering if the deal maybe prevented you from buying at certain points given your other disclosures and rules and stuff like that.

Look, the windows were sort of fundamentally normal. I think that there was a perhaps a slightly extended period of time until we got the transaction announced. But it's normally our practice, Doug, when the windows are closed, to run a program with another broker, and to (multiple speakers) market.

Yes. Got you. Okay. Thank you very much. Nice quarter.

Thank you.

Thanks.

Your next question comes from the line of Steven Chubak with Nomura. Your line is open.

Thank you. Good morning.

Good morning.

Bob, I appreciated the color that you gave on the -- or the detail on the non-personnel expense. And I recall last quarter you had guided to a normalization of that non-personnel cost. At least in the quarter, I was presently surprised to see the ratio come in closer to the lower end of the target range of 16% to 20%.

And I was wondering given the positive commentary on the backlog, as we head into year end, should we expect the non-personnel ratio to stay at the lower end of the target range or should we maybe expect a step-up given some of the increased activity?

Well, again, Steven, when I look at costs, I tend to look at costs in the absolute, not relative to revenue because that's what we really have to manage. And as I said, we were fairly -- we were pleased that it came in essentially flat quarter over quarter per person. The performance relative to the range was a function of very strong revenues. And we'll wait and see what revenues look like in Q4.

Okay. Fair enough. And I suppose sticking to the expense topic but moving on to comp, Ralph, I did appreciate the detail you had given on the comp ratio adjusting or excluding the Institutional Equities business. I was wondering if you would update us on what the comp ratio ex equities was in the year-ago quarter just so we could gauge whether we're seeing any improvement in comp leverage in the advisory segment as revenues have grown.

As I've said before, the way I believe that our investors should judge our progress on the comp ratio is by looking at consecutive trailing 12-month periods. Because one quarter is, as Bob suggested, highly driven by the volatility and the top line rather than by necessarily by our comp commitments.

Having said that, and Bob can give you specific numbers if he has them, we are in the business ex equities, the trailing 12-months comp ratio would be better than it was either a year ago or a quarter ago.

It would be slightly better. And the Delta evident in the numbers that Ralph articulated is entirely consistent with our discussion over the last several years, which is the higher comp ratio was largely driven by our early stage businesses, the equities business in particular.

So when you exclude that, naturally you're going to get a significant reduction. And the difference between the 57% that Ralph articulated and our target of 55% is our investment -- is principally our investment in new SMDs.

And I would just add to that, that if you look at the -- what I did say in my remarks is that for the first nine months of the year, our compensation ratio ex equities was 57%. I think we've consistently said that we expect to make steady progress towards a firm wide compensation ratio that's in the mid to high 50%s.

We've been doing that. And we've been making significant investments which obviously flow right through the income statement. And we've still been able to achieve that steady progress.

And we intend to continue to do that with the one caveat, which I've always made, that if we did find in any particular year an out-of-proportion opportunity to hire a larger number of SMDs than we normally do and they were all of the quality that we were accustomed to hiring, we would take advantage of that, and that might provide a slight bump in the road on that steady path.

Understood. I --

If there's any --

I'm sorry.

If we did do that, which we haven't yet, but if we did do that, we would do that with a view that it had a material positive effect on the two to three year value of the Company.

Understood. I appreciate the color, Ralph. And just one more for me on capital management.

Regarding the commentary of the increase in the buyback as well as the dividend, I'm just wondering on the buyback specifically, whether the increase and the authorization is exclusively a function of your objective to help mitigate the dilution tied to the ISI deal or whether a more attractive evaluation or multiple has made the buyback a more attractive source of capital deployment.

We have -- first of all, we had plenty of authority to take advantage of the second. So I think you should look at it as a forward-looking recognition by our Board that we have said publicly, that we said in our proxy that we will always buy back enough shares to offset RSUs issued during the bonus process.

We've succeeded, as I indicated in my comments, on average over the last five years in buying back not only enough shares to offset bonus equity but to offset all of the shares issued for new hires as well. When we announced the ISI transaction, we said we would expect that we will be able as a result of the increased cash flow to repurchase over the five-year period of the deal, roughly half.

And obviously this is a roughly, because we don't know what earnings are going to be from the -- incremental earnings are going to be from ISI. We don't know what our share price is going to be.

So we're certainly not going to be very specific on this. But it looks to us that, give or take, that kind of activity over the five-year period is something that's doable. So this decision by our Board was a forward-looking reflection of that expectation.

Understood. That's really helpful, Ralph. Thank you for taking my questions.

Sure.

Our next question comes from the line of Joel Jeffrey with KBW. Your line is open.

Good morning, guys.

Hey, Joel.

Just a question on the capital markets advisory business. I think you said it was around $25 million in the quarter. I'm just wondering, is the business dependent on having an ECM capability, or is this something you guys feel you could have done as a pure advisory firm? I'm just trying to see if this business has significant expansion capabilities given the ISI deal, or if it was really more independent?

I think the answer to your question is, yes, it does depend on having an ECM capability. Our partner, Jim Birle, who runs ECM here, and who ran ECM for Merrill Lynch for about 10 years is one of the best people in the world at this. And our whole team, Jordan Webb and so forth, of that same caliber. So, yes, that is integral to our advisory business on ECM and DCM and so forth.

Is this an area of potential expansion as well with the ISI deal?

I would say modestly. I think it's an area that we focused on. If you look at our -- the six advisory senior managing director hires that we made this year, one was Swag Ganguly, who joined us from Rothschild, which was to start a debt advisory business in London, which, by the way, is a pretty big business for the more long-standing independent advisory firms in Europe.

And so I think the principal impact of the ISI acquisition on our capital markets activities will be on ECM, although obviously having greater intellectual capital and depth in the firm allows us to be a bit more relevant across our advisory business to our clients.

Okay. Great. And then just lastly for me, I'm thinking about the fourth quarter's comp ratio. Given the slightly higher number we saw due to the Institutional Equities business this quarter, should we expect a slightly higher than expected -- higher than usual comp ratio in the fourth quarter, at least until the ISI deal closes?

Let me give you a very general answer and then Bob can supplement it. The answer is until we know when we close the ISI transaction, we're really not going to have a really strong sense of the answer to your question. And I think I've said to you that it could close as early as the beginning of November and probably as late as the end of November.

And if you think about that, that means that we could have as much as two months of ISI in our fourth quarter numbers or as little as one month. And also we obviously don't know what the revenues of ISI are going to be and whether they're going to be for two months or one month.

So it's a bit murky looking forward. And although we know exactly or pretty clearly what's going to happen depending on when we close. But it's very difficult to provide guidance without knowing the answer to that.

Okay. And, Joel, I would just -- to repeat what Ralph said, that the fourth quarter and the aggregate will undoubtedly continue to be a bit noisy as a result of the ultimate closing of the ISI acquisition.

The underlying compensation for the advisory and the investment management business, which is really what drives earnings, I would expect to evolve in a way that's fundamentally similar to every prior year, whereas we get a final look at revenues for the year will tighten up our comp ratio to the appropriate full year level.

So for the vast majority of our business, it will behave just like prior years. We'll tighten it up in the fourth quarter. Equities will introduce noise.

And you should expect that we will, as we hopefully did this quarter, provide enough supplemental information so that you can look through that noise to see how the core large business is doing.

There appears to be no questions at this time. I would now like to turn the floor to Ralph Schlosstein for any closing comments.

All right. Thank you very much for your time and we'll look forward to speaking with you after the end of the year.

Thanks, everyone.

This concludes today's Evercore third quarter 2014 financial results conference call. You may now disconnect.