Piper Sandler Companies (PIPR) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Piper Jaffray Companies conference call to discuss the financial results for the third quarter of 2007.

During the question and answer session, securities industry professionals may ask questions of management. The Company has asked that I remind you statements on this call that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements that involve inherent risks and uncertainties. Factors that could cause actual results to differ materially from those anticipated are identified in the Company's report on the file in the SEC, which are available on the Company's website at www.PiperJaffray.com and on the SEC website at www.SEC.gov.

And now I would now like to turn the call over to Mr. Andrew Duff. Mr. Duff, you may begin your call.

Thank you and good morning. The Capital Markets conditions in the third quarter were extremely challenging, and as a result, we reported disappointing financial performance. Let me be clear -- our business is not focused in the troubled credit market areas, specifically subprime mortgages and LBO loan commitments. That said, the fallout from these markets created a very challenging Capital Markets environment.

As a result, nearly all of our businesses were negatively impacted, including equity and taxable debt financings, mergers and acquisitions, and sales and trading.

However, we believe the negative impacts to our business were largely concentrated in the third quarter. Our current deal pipelines are strong, and we believe the current environment is more conducive to Capital Markets activity. For example, at the end of September and in early October, we co-managed IPOs for AthenaHealth, China Digital TV and Compellent Technologies. All deals priced above the filing range and are currently trading at significant premiums of 40% and more to their offering price. We believe this is indicative of a more receptive investor appetite and bodes well for a more positive environment for the fourth quarter.

Despite the difficult conditions in the quarter, we continued to execute against our growth strategy. We successfully completed our acquisition of FAMCO in the third quarter, and in early October we closed the Goldbond transaction. We're pleased with the performance of FAMCO, and we expect our newly expanded operations in Asia to positively contribute to our fourth-quarter results. Both of these businesses will help to broaden our capabilities and diversify our revenues into future quarters.

Now I would like to turn it over to Tom Schnettler to review the financial results in more detail. Tom?

Thank you, Andrew. As Andrew reviewed, the adverse conditions in the Capital Markets significantly impacted our results in the third quarter, particularly investment banking revenues. We generated net revenues of $92.9 million, a decline of 20% from the third quarter of 2006 and a decline of 24% from the second quarter of 2007. Net income from continuing operations was $4.8 million compared to $9.5 million in the year ago period and $10.4 million in the second quarter of 2007. The difficult Capital Markets conditions were particularly apparent in significantly lower equity financings.

Health care and consumer -- two of our core sectors -- were particularly hard-hit. Year-over-year the number of health care and consumer financings in the industry dropped 20% and 50% respectively. Quarter-over-quarter the number of health care and consumer financings each declined over 70%. Piper Jaffray mirrored these trends, and our revenues reflected the steep industry decline in activity. Equity financing revenues were $18.2 million, down 42% compared to the year ago period and 55% compared to the second quarter. However, currently our US equity backlog stands at 22 transactions, the highest level year-to-date. We are lead or co-lead manager on 11 of these deals in our backlog, and all of our sectors are represented.

Debt financing revenues were $18.2 million, a decline of 6% compared to last year and a decline of 28% compared to the second quarter of 2007. Public finance revenues weathered the downturn in market conditions reasonably well. Public finance revenues increased slightly year-over-year as higher average revenue per municipal transaction offset -- more than offset fewer completed transactions. Public finance revenues declined compared to the sequential quarter during which revenues were at or near record levels.

Due to difficult market conditions, our taxable debt financing revenues, including high-yield, were negligible in the third quarter. Taxable financings represent a minority component of our overall debt financing revenues. However, negligible revenue generation in this area added to the weak overall investment banking results.

Advisory services revenues were $16.1 million, down 27% compared to the year ago period. Revenues rose 38% compared to the sequential quarter. We experienced a significant impact on our M&A business as a result of the difficulty in the credit markets. For example, we were the buy-side advisor to Loan Star Funds in its acquisition of Accredited Home Lenders. This transaction was renegotiated during the quarter, and as a result, the closing was delayed from the third quarter to the fourth quarter.

Now let me turn to sales and trading. Revenues were $38.8 million, down 11% compared to the year ago period and down 14% compared to the second quarter of 2007. Due to the higher market volatility, we realized increased trading losses in our equities business. We did experience higher trading volumes in July and roughly through mid-August. However, volumes significantly tapered off ahead of the Federal Reserve meeting in mid-September.

In addition, due to more difficult market conditions, we realized higher trading losses in high-yield and structured products and our taxable fixed-income and -- our fixed-income, sales and trading area.

Let me turn now to operating expenses. Compensation costs were naturally lower given the reduction in profitability. The compensation ratio for the third quarter was 58.5%. Non-compensation expenses were $32.5 million or relatively flat to the third quarter of last year. Non-compensation expenses were down 9% compared to the second quarter of 2007, mainly driven by lower occupancy costs and decreased legal fees. The sharp drop in revenue resulted in negative operating leverage, and our pretax operating margin for the quarter was compressed to 6.5%.

Turning to discontinued operations, in the third quarter of 2007, we recorded a loss of $456,000 after-tax. The loss included costs primarily related to decommissioning a retail-oriented backoffice system. The decommissioning of the system was completed on schedule in the third quarter, and we do not anticipate that we will incur any additional costs related to this system.

Finally, in early August we completed the repurchase of $70 million or 1.4 million shares of our common stock. The average repurchase price was $48.87. We have now completed the $180 million share repurchase program authorized by our Board of Directors at the time we closed the sale of our Private Client Services business in August '06.

That concludes our formal remarks. Now Andrew and I will be happy to answer your questions.

(OPERATOR INSTRUCTIONS). Lauren Smith.

Two questions. One, could you talk to the tax rate, and is there anything there of note that drove it considerably lower than prior quarters?

Yes, the tax rate on a year-to-date basis is now 31.7%. I think this is indicative of the rate we would see going forward. The low rate in the third quarter was really related to bringing our year-to-date rate to that level. That level of taxes really related to a higher proportion of municipal interest income to total income.

Okay. So we should be sort of thinking about in and around 32% as kind of a run-rate going forward?

Yes.

Okay. And then with respect to stock repurchase, you completed the outstanding remainder of the 180. Particularly given where the stock price is, is that something we should be thinking about? I mean would you be likely to reload your repurchase authorization?

We don't intend to seek authorization from the board at this time for further repurchases. We're looking at a number of opportunities to deploy capital in the business, and we would intend to go forward with that strategy.

Okay. That is all I have for the moment. Thank you.

[Alex Blaustein].

I have a couple of questions about FAMCO. Could you -- so there were basically two weeks as far as I understand in the quarter included with FAMCO results. Is that correct?

Yes.

Can you give us a little more color as far as the the fees you guys saw from FAMCO in the quarter? We saw basically and obviously there's a 900 million -- $100,000 Asset Management, but I guess some of that is related to private equity activities?

Yes, the majority of that would be FAMCO.

Okay. And, as far as the assets under management, at the time of the acquisition, I think it was about when the acquisition was announced about $9 billion, and then when it closed, it went down to about 8.2. Can you just give us an idea of what happened there and where the assets ended the quarter?

Yes, it was actually 8.3 at the time of the close. There was one significant client who did not provide consent to the acquisition. So the cash payment at the close was adjusted accordingly, and those are indicative balances for the end of the quarter.

Okay.

(OPERATOR INSTRUCTIONS). David Trone.

You guys had mentioned that there was some high-yield in the structured product losses. Is there any way you could quantify that? Do you mean losses -- characterize what you mean by losses? Do you mean markdowns?

I mean that in some of the inventory positions that we were carrying in support of our high-yield and structured product trading activity, yes, we took some markdowns against those inventories.

Okay. And can you quantify it?

We don't provide that on a kind of product by product basis.

Okay. Thank you.

There are no further questions. I am sorry we do have a question. [Liz Skinner].

I was wondering, you mentioned that there are a number of opportunities to deploy capital into the business. Could you go into what some of those you are looking at?

This is Andrew. We are continuing to look at opportunities consistent with our strategy where we can add additional product capabilities, new industry sectors or expand our geographic footprint. And the two that we have accomplished recently are pretty indicative of that. The opportunity to get a bigger footprint into Asia and to re-enter the Asset Management business. Not to mention ongoing development of the number of principaling activities. So we do see the need for additional capital to deploy in these strategies.

And I would remind you our balance sheet remains unlevered. So we believe we have the capacity to get the capital we need to develop these strategies.

(OPERATOR INSTRUCTIONS). There are no further questions.

Okay. Well, let me just make a closing comment. We continue to believe we are demonstrating solid execution over the last several years against our aggressive growth strategy. We are undeterred by the temporary market upsets, and we will continue on the course that we have been on for the last several years. Thank you all for joining us today.

This concludes today's conference call. You may now disconnect.