Piper Sandler Companies (PIPR) 2007 Q4 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 fourth quarter and full year 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 fact, 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 reports on file with the SEC, which are available on the Company's Web site at www.PiperJaffray.com, and on the SEC Web site at www.SEC.gov.

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

Thank you and good morning. We are very pleased to report solid financial results for the fourth quarter against a backdrop of a challenging operating environment. Well into October market conditions were strong, but the turmoil in the credit markets that prevailed in the third quarter of this year resurged in November and December, creating challenging financial markets.

Despite these challenges, most of our businesses delivered solid results in the quarter. Our equity financing and equity sales and trading businesses each generated the highest quarterly revenues since we became a public company. M&A activity was also strong. We recorded the second-highest quarterly revenues since becoming a public company. Public finance revenues were in line with normal quarterly performance. In addition, the fourth quarter of 2007 was the first full quarter of results for FAMCO and Goldbond. Both of these businesses contributed to our top-line and our profitability.

However, we were not immune from the volatile markets. We felt the effects on our fixed income sales and trading, specifically, high-yield and structured products. But the strong results in our other businesses more than offset these lower revenues.

Now I will make a few comments on the year. In 2007 we set a new mission for our firm to become the leading international middle-market investment bank and institutional securities firm. I am very pleased that we achieved meaningful progress against our mission during this past year. Let me provide the key highlights of our execution.

First, we reentered the asset management business with the acquisition of FAMCO. This addition helps us diversify our revenue mix and provides a solid foundation for our asset management business. We are committed to expanding these revenues through organic growth in addition to acquisitions.

Second, we significantly expanded our Asian platform with the acquisition of Goldbond, now called Piper Jaffray Asia. Combined with the successful operation we built in Europe, we are now able to raise capital for our clients in each of the world's three primary centers of finance -- New York, London and Hong Kong. Piper Jaffray Asia is instrumental for our company as we continue to diversify our international revenue, which has grown from less than 5% in 2005 to 14% in 2007.

Finally, as we execute our mission, we expect to increasingly commit our own capital to engage in proprietary trading, principal investing, and similar activities. We will approach these activities in a moderate and disciplined manner.

The progress we made in 2007 reflects the dedication and hard work of our employees, who are committed to earning our clients' trust every day. I would like to thank them for their -- for keeping their focus on our clients through the difficult conditions that prevailed during the last half of 2007.

I would like to finish my remarks with a few comments on 2008. The current market conditions are clearly challenging, causing us to have a cautious view of the first half of 2008. The turmoil in the credit market continues. We are not exposed to the hardest hit areas of the credit market, but there is spillover to businesses that we do participate in. For instance, difficulties impacting bond insurers could impact our municipal business. In addition, the equity markets are clearly facing headwinds. Importantly, we are actively communicating with our clients, anticipating impacts, and managing our business.

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

Thank you, Andrew. We reported strong top-line performance in the fourth quarter. We generated net revenues of 146.5 million, essentially the same as the fourth quarter of 2006, and up 58% compared to the difficult third quarter of 2007. The equities-related businesses and advisory services were strong, and more than offset weaker performance in the fixed income businesses.

Equity financings were strong in the fourth quarter and generated net revenues of 43 million, up 30% from the fourth quarter of 2006, and up 136% from the third quarter of 2007. Our equity backlog was strong heading into the fourth quarter, and the financings remained active throughout the period. Compared to the third quarter of 2007, we nearly tripled the number of completed transactions and the amount of capital raised. Currently our equity financing backlog consists of 11 transactions. This compares to 22 when we announced our third-quarter earnings.

Advisory services revenues were also strong in the fourth quarter. Net revenues were 36.7 million, up 6% compared to the year-ago period, and up 128% compared to the third quarter of 2007. The stronger performance was driven by improved results from the US business and contributions from Europe and Asia.

Equity sales and trading also performed well in the quarter. Net revenues were 35 million, up 19% from the year-ago period, and up 39% compared to the sequential third quarter. This performance was driven by stronger commissions and improved trading performance in US equities, and a solid contribution from the Hong Kong equities business.

Now I will turn to our fixed income businesses. Fixed income financing revenues were 16.8 million, the majority of which represent public finance underwriting revenues. Net revenues from this business were down 37% compared to a year ago, when we generated near-record public finance underwriting revenues. Compared to the third quarter of 2007, overall fixed income financing revenues were down 8%. However, public finance underwriting revenues were consistent, holding up well in a turbulent environment.

Fixed income sales and trading revenues were 11.1 million, a decline of 42% compared to the fourth quarter of 2006, and a decline of 19% compared to the third quarter of 2007. The declines were primarily driven by lower revenues from high-yield and structured products, which continued to generate weaker revenues due to challenging market conditions.

Now I will cover non-interest expenses. For the fourth quarter of 2007, compensation and benefit expenses were 85.7 million, down 3% from the fourth quarter of 2006, and up 58% compared to the sequential third quarter. The increase compared to the third quarter was due to stronger revenues. The compensation ratio for the fourth quarter was 58.5%, compared to 60.4% last year and 58.5% in the third quarter of 2007.

For the fourth quarter of '07, non-compensation expenses were 41.7 million, of which 2.5 million were attributed to FAMCO and Goldbond. The prior-year non-compensation expenses were 16 million, which included a $21.3 million benefit due to the reduction of a litigation reserve. Excluding that benefit, non-compensation expenses were 37.3 million. Compared to the third quarter of 2007, non-compensation expenses increased 28%. The increases were driven by business expansion, including the addition of FAMCO and Goldbond, increased business activity resulting in higher marketing and travel expense, and higher legal expense.

For the fourth quarter of 2007, pre-tax operating margin was 13.1%, which compared to 28.6% for the fourth quarter of 2006, which included a 14.5 percentage point benefit due to the litigation reserve reduction. Excluding that benefit, pre-tax operating margin was 14.1% in the year-ago period. For the third quarter of 2007, pre-tax operating margin was 6.5%.

Finally, for the full year of 2007, net revenues from continuing operations were $499 million, slightly less than the $503 million reported in 2006. Despite challenging market conditions in the last half of 2007, investment banking revenues rose 2% compared to 2006. Equity financing revenues topped '06 by 14% and more than offset lower advisory services revenues and slightly lower debt financing revenues. Equity sales and trading revenues were essentially flat compared to 2006, while fixed income sales and trading revenues, which were impacted by the turmoil in the financial markets during the last half of the year, declined compared to 2006.

Our pre-tax operating margin for the full year was 12.6%, compared to 19.5% last year, which included a 4.2 percentage point benefit due to the litigation reserve reduction. Excluding that benefit, pre-tax operating margin was 15.3% in '06.

Non-compensation expenses for the full year were $144.1 million, compared to $113.8 million in 2006, which includes the $21.3 million benefit due to the reserve reduction. Excluding that benefit, non-compensation expenses were 135 million. Increased non-compensation expenses in 2007 were driven primarily by expansion of the business, including the acquisition of FAMCO and Goldbond, and the implementation costs related to a new back-office system.

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

(OPERATOR INSTRUCTIONS). William Tanona, Goldman Sachs.

You guys mentioned a little bit about the equity backlog, but I didn't hear anything about the overall aggregate investment banking pipeline. Just wanted to get your thoughts on the overall investment banking pipeline as you kind of enter 2008 here, considering that it seems that your investment banking revenues tend to be a little bit more volatile than some of your peers.

That's probably a fair characterization, looking back over the last several quarters. I would say we feel reasonably good about our investment banking backlog. However, I would say the current state of the markets presents uncertainties around transaction timing.

And I guess there's, obviously, a lot going on with the financial guarantors right now in the marketplace, and concerns about the public finance business, and what that may mean for that segment of the marketplace. Obviously, that's a pretty big part of the business for you guys. Just wanted to get your thoughts in terms of what you think the impact is going to be to your public finance business as it relates to the monolines.

We don't anticipate that the disruption to the bond insurers will significantly impact our municipal underwriting business. However, we do think the larger impact will be to the shorter rate securities, the floaters and the [option] rate. And clearly, the marketplace needs to see through and look at the underlying credits and potentially [go after] the transitions to stronger enhancements in some of the current ones.

How big of businesses are those for you guys?

The public finance business overall is about 90 million. That's a blend weighted towards the long-term traditional fixed rate underwriting.

That's helpful. And one last question and I can get back into the queue. The non-comp expenses, obviously, ticked up here pretty considerably in the quarter. Were there any kind of onetime items in there? How should we be thinking about that in terms of a run rate looking into 2008?

Looking forward to -- first of all, there weren't any substantial onetime items in that. So, looking forward into '08, I would look at our full-year '07 non-comps of 144 million. I would increase that to account for a full-year impact of FAMCO and Goldbond, and some increase due to growth in the business. Our overall goal is to reduce non-compensation expenses as a percentage of revenue. We continue to be very focused on that.

Thanks.

Douglas Sipkin, Wachovia.

Congratulations. Just a couple quick questions. One, hoping you guys can provide some color around, maybe not Goldbond specifically, or now Piper Jaffray Asia, but what percentage of the revenues in the fourth quarter were attributable to Asia?

We don't break that out. Goldbond contributed, as we said, both to our top-line and to our profitability. Piper Jaffray Asia, as we now look at our combined resources of what we had prior to the acquisition, as well as Goldbond, was a meaningful contributor, especially to the equity financings business, where we had a pretty good flow of China-based transactions in the fourth quarter.

Okay. Anymore -- can you give us an update on when you guys might plan on accessing the debt markets in a broader way? I know you guys talked about first redeploying the capital; it looks like that now has run its course and has been somewhat effective. Where are we now in terms of you guys potentially going out into the markets and getting some leverage?

We continue to look at that and feel that it's an option that's available to us. Obviously, the turmoil in the credit markets probably makes that a little more expensive than it would have been prior to sort of the back half of 2007. So, I think we're looking at available options, and also using some judgment around timing relative to current market conditions and our need for capital. So it's something that continues to be under review.

Finally, and my numbers could be wrong, but I believe I had about 8.3 billion in AUM at the end of the third quarter, and you guys have 9 now. One, if those numbers are right; and two, if so, what accounts for the big change quarter-on-quarter?

Your numbers are correct, and they did bring in some substantial new business in the fourth quarter.

So most of that increase, obviously, was flow with the markets. I think the S&P was up a little bit, but --

Yes it was; it was flows, net new assets.

So we could say, maybe, net new assets of like 500 million or so?

Yes. And I thought that was particularly impressive for an organization, obviously, going through an ownership change. So, job well done.

Thanks a lot.

David Trone, Fox-Pitt.

The revenue delta in the quarter sequentially was about 54 million. Is there any way you could tell us how much of that was due to Goldbond and the full-quarter effect of FAMCO?

FAMCO you can see really in the asset management line. So, that's really FAMCO. Goldbond, again, we don't break out that as an operating unit; it's within investment banking institutional brokerage. Again, Piper Jaffray Asia overall, the combination of Goldbond and our prior existing Piper Jaffray resources in Asia, was a meaningful contributor to the fourth quarter, in particular, again, on the equity financings -- in the equity financings area.

Okay. How could you help the investment community understand just how strong the organic growth was then?

I would say the vast majority of that, certainly that delta from quarter to quarter, was driven by our core business in the (multiple speakers)

Okay, good. You obviously noticed that -- I would assume you would have noticed that four of your peers, either specifically or indirectly, have kind of disclosed higher comp ratios on the year. And you guys were not in that camp. Is there anything that -- any color on that? Are you feeling any comp pressure? And I know one of those four did have lower revenues, so the math kind of works that way, but the other three actually had revenue growth and still felt some comp pressure. So how do you -- what are your thoughts on that?

Clearly, providing competitive compensation for our top talent is always a priority for us. We do think about the mix of cash and equity, and how that should be most effective and appropriate [for] our employees. But when we looked at the year in total, and particularly the strong fourth quarter, we believed we'd adequately accrued compensation.

One more, then. I think I missed it; you probably talked about the unusually low tax rate.

I don't think I referenced it in my remarks, but the tax rate is driven by a couple things. One is higher proportion of tax-exempt interest income to total revenues, and also the higher contribution from Goldbond, which does carry a lower (multiple speakers)

Yes. So how should we think about that going forward?

I would look at our overall effective rate for '06, which was 35.7%, and then there will be some reduction from that level, given the contributions now going forward from Piper Jaffray Asia, which will carry a lower tax rate.

Great. Thanks a lot.

Devin Ryan, Sandler O'Neill.

So increasing principal investments has been a focus of the Company. Can you talk about how the current environment is making you feel about the principal investing opportunities? I guess specifically, is the current dislocation in particular asset classes providing attractive opportunities, or is the risk reward not attractive enough given kind of the volatility we're seeing here?

Let me make a couple of comments. We have both equity and fixed income proprietary strategies. We have been developing these over the last couple of years in a disciplined manner with a focus on risk management. For the fourth quarter and the full year, our proprietary strategies contributed positive net revenues. We remain cautious and thoughtful, but have been able to execute those strategies in a profitable manner.

Can you talk a little bit about the advisory services strength, I guess, in a bit more detail here? I guess specifically, were their particularly large deals that closed during the quarter, or was it just more a function of a lot of smaller deals closing?

It's really both. We had a couple of larger transactions, which are not inconsistent with other periods of strong results in that line item, but also a significant number of transactions. So, it was really both. Again, it was a near record quarter for advisory services. So we had both factors contributing.

And then finally, can you give any disclosure regarding -- or even an approximate size of the trading losses due to just the inventory markdowns? And I guess specifically, what asset classes suffered the biggest markdowns?

Our -- we had net positive revenues in all of our trading areas, including the fixed income areas. So there weren't -- there were not net trading losses on any of the desks.

Right. But were there markdowns to kind of your inventory or your holdings?

We had some modest markdowns in various areas, but again, net positive revenues on all of our desks.

Thanks for taking my questions.

Steve Scinicariello, BlackRock.

Great to see the revenue rebound this quarter. Just have one quick question. As you kind of look out and think about the pre-tax operating margin, kind of where do you kind of want to see that a year or two from now as you kind of start to gain traction from the organization as you look ahead?

We certainly want to see it north of where we are this year, and that will depend on, really, accomplishing some of our goals in terms of some of our new initiatives, as well as just building out our core business. I don't know that we'll throw out a specific number, but I think something several points north of where we ended up this year would be a goal for us over the next couple of years.

Maybe another way of thinking about that is looking at our peer group. And it's been our intention as we spun and reorganized the Company to capital markets, investment banking orientation that we'd be the top performer in the group. And that would get you in that same range, mid-teens.

Great. Thanks very much, and keep up the good work.

(OPERATOR INSTRUCTIONS). Joel Jeffrey, KBW.

Just a quick question. In terms of the acquisition of FAMCO, I believe there was a contingency payment that could be paid out based on assets under management growth. Has that been reached?

Yes. There was an additional opportunity on December 15. We did pay them an additional $900,000.

Great. That's it. Thank you very much.

(OPERATOR INSTRUCTIONS). There are no questions at this time.

Let me close the call by a couple of thoughts. I'm confident we have the right strategy for our firm. I am proud of our achievements against this strategy in 2007. I look forward to updating you on further progress in 2008. Thank you for joining us this morning.

Thank you for participating in today's conference. You may now disconnect.