B Riley Financial Inc (RILYL) 2018 Q1 法說會逐字稿

Good afternoon, and welcome to the B. Riley Financial's First Quarter 2018 Earnings Conference Call. My name is Doug, and I will be your operator for today's call.

Joining us for today's call are B. Riley Financial's Chairman and CEO, Bryant Riley; President, Tom Kelleher; and CFO and COO, Phillip Ahn. Following their remarks, we will open up the call for questions. Then, before we conclude today's call, I'll provide the necessary cautions regarding the forward-looking statements made by management during this call.

I would like to remind everybody that this call will be recorded and made available for replay via a link available in the Investor Relations section of the company's website at www.brileyfin.com.

Now I would like to turn the call over to the B. Riley Financial's Chairman and CEO, Mr. Bryant Riley. Please proceed.

Thanks, Doug. Welcome, everyone, and thank you for joining us for our call this afternoon. We issued our press release with financial results for the first quarter ended March 31, 2018, earlier today. You can find a copy of the release on the IR section of our website.

Our first quarter results were driven by the completion of a large retail liquidation engagement, which contributed to strong results in our Auction and Liquidation segment. These gains helped offset more modest results in the broker-dealer business under our Capital Markets segment.

Q1 '18 was another solid quarter for our Appraisal business following a record year in 2017, and we continue to be pleased with the steady cash flow levels generated by United Online as part of our Principal Investments segment. We believe our first quarter results demonstrate the attractiveness of our business model, which we've strategically designed to provide us with the sources of recurring revenue and cash flow as well as opportunities to generate and capitalize from opportunities with potentially outsized returns. As we've mentioned before, a key component to our business model is the utilization of our balance sheet to facilitate profitable investments and create fee opportunities, and we believe we have meaningful capacity to increase our leverage and create returns to our shareholders, far in excess of our cost of capital.

As you can see from our release, we have issued guidance for Q2 2018. Adjusted EBITDA in the range of $22 million to $30 million and net income in the range of $5.4 million to $10 million. While we don't typically provide guidance, we felt that it was important to highlight the current strength of our business to our shareholders. This will be the first quarter since our merger with FBR that we expect both of GA liquidation and Capital Markets to be meaningful contributors in the same quarter.

With that, I will hand it over to Phil Ahn, our CFO, to walk us through our financial performance before I get into a more detailed analysis of individual segments. Phil?

Thanks, Bryant, and welcome, everyone. For the first quarter of 2018, our revenues totaled $95.8 million, which is up from $52.9 million in Q1 of last year. On January 1 of this year, we adopted Accounting Standards Codification 606. So for this quarter and in future quarters, we will discuss sources of our segment revenue in more detail than we have previously. Prior reported financial information will not be revised for historical comparable periods, but these figures will be captured in future quarterly reports.

Turning to our revenue mix by segment. Our Capital Markets segment includes results from our combined broker-dealer, which includes the completed acquisition of FBR & Co. and Wunderlich Securities in 2017 as well as results from our Wealth Management, Asset Management and securities lending businesses.

Total first quarter revenues for this segment amounted to $60.3 million, which is up from $17.7 million in the same year ago period. The year-over-year increase is primarily due to revenues generated from services and fees associated with the company's acquisitions of FBR & Co. and Wunderlich Securities.

Revenues for the first quarter of 2018 include $52.8 million generated from services and fees and $7.6 million generated from interest income by securities lending. The segment generated a loss of approximately $300,000 for the first quarter. This compares to $6.6 million in the same year ago period.

Revenues for our Auction and Liquidation segment totaled $15.5 million in services and fees for the first quarter of 2018. Revenues for this segment increased from $14 million for the first quarter of 2017. The uptick in revenues was driven by services and fees associated with the completion of a large retail liquidation engagement during the first 3 months of 2018. Our Auction and Liquidation segment generated an income of $8.1 million in the first quarter of 2018, which is an increase from -- compared to $1.8 million in the same year ago period. As previously stated, we expect reported revenues for this segment to vary from quarter-to-quarter due to the episodic nature of the retail liquidations business.

For the first quarter of 2018, revenues in our Valuation and Appraisal segment increased to $8.5 million for the first quarter of 2018, up from $7.8 million in the same year ago period. This segment generated income of $1.9 million for the first quarter 2018 compared to $2.0 million in the same year ago period.

And finally, in our Principal Investments segment, which currently consists of United Online, revenues for this segment, which is primarily driven by services and fees and partially by the sale of goods, totaled $11.4 million in the first quarter of 2018. This compares to $13.4 million in the same year ago period. As we have mentioned in prior calls, due to the nature of United Online's business, we expect revenues to decline over time. However, despite this decrease in revenues, income generated for this segment increased to $4.9 million in the first quarter of 2018 when compared to $4.2 million in income reported in the same year ago period.

Now turning to our profitability metrics, which are attributable to B. Riley Financial as a whole. Our net income for Q1 2018 was $4.5 million or $0.17 per diluted share. This compares to $14 million in net income or $0.71 per diluted share in the same year ago period. For the first quarter of 2018, adjusted net income, which is non-GAAP metric, totaled $8.8 million or $0.32 per diluted share. This compares to $7.7 million in adjusted net income or $0.39 per diluted share reported in the same year ago period.

Adjusted EBITDA, which is another non-GAAP metric, totaled $16.1 million for the first quarter of 2018. This compares to $15 million in adjusted EBITDA reported in the same year ago period. For further discussion about adjusted EBITDA and adjusted net income and a reconciliation to the nearest GAAP measures, you can refer to the section in today's earnings release regarding use of non-GAAP financial measures.

Now turning to our balance sheet. As of March 31, 2018, we had $74.3 million in unrestricted cash and cash equivalents, $23.4 million in restricted cash, $47.9 million due from clearing brokers, $131.1 million in net securities and other investments owned, and $212.8 million in total debt.

Total stockholders' equity was $271.5 million as of March 31, 2018, which was up from $266 million at the end of 2017.

Our shares outstanding at the end of the quarter were approximately 26.7 million. Subsequent to the end of the quarter, we completed the repurchase of 950,000 shares, bringing our total current shares to approximately 25.7 million.

We also issued guidance for our first -- for our second quarter results in the press release we issued earlier today. Looking ahead, we anticipate Q2 2018 net income in the range of $5.4 million to $10 million and Q2 2018, adjusted EBITDA in the range of $22 million to $30 million. This range reflects the potential impact of larger fee opportunities from our broker-dealer and Auction and Liquidation businesses and the impact they may have on the bottom line, in addition to results driven by the consistent performance in our Appraisal and United Online businesses.

Lastly, our Board of Directors approved a special dividend of $0.04 per share in addition to our regular quarterly dividend of $0.08 per share, which will be paid on or about June 5, 2018 to stockholders of record as of May 21, 2018.

That completes my financial summary so now I'll turn the call back over to Bryant. Bryant?

Thanks, Phil. We're pleased with the overall strength and performance across most of our segments and believe our Q1 results and Q2 guidance are indicative of the continued momentum for our business as a whole and disciplined expense management. As we've highlighted in the past, one of our strongest assets is the amount of opportunities our diverse platform presents us with. So in that vein, today's discussion will be about how all of our businesses fit into and feed the broader B. Riley platform, highlighted by some of our recent accomplishments in this area.

Let's start with Capital Markets. Q1 was the first complete quarter with consolidated results from our combined banking and brokerage under the name of B. Riley FBR. While we had a slow quarter, we were EBITDA positive and have continued to reduce our fixed costs and lower our breakeven. We are well positioned to generate meaningful profits in a larger fee opportunity environment, which we expect in Q2.

A few highlights from the first quarter. Our Capital Markets team underwrote several transactions, including the $125 million offering for Gordon Pointe, which is a NASDAQ-listed special-purpose acquisition company, which will invest in the same sector. This is the third stock we've raised since the FBR acquisition.

We also successfully placed a $56 million bought deal from Limelight Networks and let an upsized $40 million confidentially marketed transaction for Gaia.

Right up to the Limelight transaction, this is an example of our ability to win business driven by what we believe are 3 key differentiators for us: one, being the [quality, having] confidence that we have in our analyst research process; two, a balance sheet that allows us to move on opportunities quickly; and three, a sales force with unparalleled small cap distribution.

While [regularly] cash equities commission business remains challenging, we are pleased with how our numbers have held up in the current environment, and our sales and trading desk is an important piece of our value offered to our institutions.

A real standout for the quarter was our ATM business, which was very active. In fact, March was the largest single month in our history. We were involved in over 70 different issuers, primarily in the health care, real estate and energy sectors. Our advisory and restructuring units closed on a number of sell-side mandates and is actively involved in several transactions that we expect to close in Q2. We are seeing a general trend of larger deal size across this segment.

On the RIA Wealth Management side, assets under administration for our legacy Wunderlich Wealth Management group remained flat at approximately $8.6 billion in Q1. As previously mentioned, Wealth Management is one of our more stable predictable parts of our business and outside of acquisitions, we don't anticipate big swings in this segment. We will be changing the name of this group to B. Riley Wealth Management as we look to consolidate our brands.

We're currently gearing up for our 19th Annual Institutional Investor Conference, which takes place later this month. This year, we anticipate we have more than 200 presenting companies and more than 1,000 attendees. The growth of our annual marquee event can be credited to our expanded research products of more than 500 companies under coverage as well as to the growth of our firm as a whole, which has afforded us with a more diverse pool of companies to feature at our event.

Moving on to our Great American business, starting with the Auction and Liquidation segment. Q1 was extremely active, reflecting the $8.1 million generated net income for the quarter, which is a significant increase compared to the $1.8 million of income generated for the first quarter of 2017. The quarter started off with the completion of the Sears Canada liquidation and continued with the successful start of the Toys "R" Us liquidation with our JV liquidation partners. Last month, we also announced that we won a competitive bid to lead the liquidation of Bon Ton stores. The liquidation of Toys "R" Us and Bon Ton combined represent over $4 billion of retail inventory. Being involved in deals on a scale this large is something we believe speaks to our position as a world-class leader in the asset-disposition space.

Our Bon Ton win is a great example of the B. Riley platform at play. Proceeds of the sale go to pay down Bon Ton's debt to creditors and senior secured note holders in addition to the usual wind down costs associated with liquidation. Our competitive edge in this case was our ability to bring a compelling JV deal structure to the table to outbid the other liquidators, while providing enhanced returns for creditors. We expect to see more opportunity to get involved in these types of creative deal structures that take advantage of our unique platform, especially as the trend in retail continued to accelerate.

Now moving to Valuation and Appraisal segment part of our Great American business. Our Appraisal business continues to maintain strong and steady earnings quarter after quarter. And another example of how we're using leveraging cross-platform expertise and long-standing relationships, our Appraisal business supported in several marquee transactions for our asset-based lending clients in Q1. In addition to healthy growth with our core appraisal customers of financial institutions and corporates, we are building out our industry vertical focus, which has helped expand our client base to financial sponsors and direct deal sources.

Now moving on to our Principal Investments segment. Our Principal Investments group mandate is investor-acquired assets with a focus on cash generation to our company and shareholders. We apply a private equity approach to investing and operating businesses, which drives cash generation and allows us to leverage our small-sized, mid-cap industry expertise and deal flow.

An example of how we apply these practices is highlighted by accomplishments with United Online since acquiring the company in 2016. United Online serves as a significant source of steady income for us and continues to perform beyond expectations. United Online is operating ahead of plan from a cash generation standpoint and should be fully paid for in the next few months, while continuing to generate strong EBITDA over the next few years.

As previously announced, we acquired a controlling stake in bebe stores through our Principal Investments group. This transaction serves as a platform for small, midsized acquisitions, and we're working closely with the company to identify acquisitions that are well positioned to take advantage of bebe's significant NOL of approximately $340 million.

In addition, we expect our previously announced magicJack transaction to close in the next 3 months and look forward to discussing its contributions to our Principal Investments segment in the future quarters once the customer closing process is complete.

We're very excited to see the power of our integrated B. Riley Financial platform at play as we leverage more and more creative deal structures and work to apply relevant cross-platform opportunities that help diversify and help expand our business service offerings for our clients. The growth in our business has created what we believe to be an attractive business model for our investors, and we are as excited about opportunities as we have ever been.

With that, we're ready to open the call for your questions.

(Operator Instructions) Our first question comes from the line of Wes Cummins with Nokomis Capital.

A question first on the Principal Investments. One, it sounds -- or you just said that maybe in the next 3 months, the magicJack deal will close. Are you guys looking at other opportunities there? And then also, since that's typically a steadier run rate business, anything we could expect on the way you think about the dividend after that deal closes?

Wes, so look, I think that we see more opportunities than we almost know what to do with. So they've got to be really, really good and they've got to be super-opportunistic. So I've said this I think before on other calls. If we are not out in bake-offs or really -- what we're trying to do is become a place or a company that people will call when they need to get disposed of something. It's not dissimilar to our Liquidation business. We want to be able to find really attractive asset purchase opportunities, but we want to do it in a way that I think is advantageous to us, maybe more so than the seller. As it relates to how we think about the magicJack cash flows, what I would say is, when we first went public through that acquisition of GA, we cited a goal to distribute 15% to 25% of our EBITDA to our shareholders. We thought that's a way to balance going out, looking into investments, but also giving returns to our shareholders. And -- so I would say that's going to be -- we believe strongly in that. We enhanced that a bit by the purchase -- decent-sized block purchase of shares this quarter. But I would expect that we would continue to really behave in the same manner. And the way that we always looked at United Online and why we have a base dividend was because we felt very comfortable that cash flow is going to come every quarter and magicJack is a similar type of asset to United Online and I would expect that we would react kind of in the same way.

Okay. And then the last question I have is, historically, when you've given guidance for the quarter ahead, I think you've done it a couple of times, even if it's out towards the high end or even above the high end of that guidance, maybe just, if you can, help me with the kind of the puts and takes of the guidance for the quarter. What could get you towards the high end or what's, I guess, at risk to be more at the lower end of that guidance? If not, I understand.

So I would say the way that I would think about it is, if logic would dictate for us to be on the low end, we would expect some things that we're hopeful of happening wouldn't happen. And for us to be on the high end, we would -- there would have to be some things that maybe we don't even know about yet would have to happen. And so we are not -- we feel really good about how this quarter looks, and we're very excited to be providing that guidance because I think the platform's really paying off, and we're particularly excited that both sides of the most meaningful contributors to that are contributing. If you remember, in Q4, the Liquidation business lost money and the broker-dealer made a lot of money, and then this was completely reversed. So I'm excited that both of them as we see it now and things can change, but as we see it now will be meaningful contributors. So again I would say that, the way we would look at is the low would be some things we're not expecting, the high end would be -- on the bad side, the high end would be some things that we're not expecting on the upside, and the middle would be something between it. We -- it's a tough range, it's a big range. But you have to realize, we have binary events in some of our fees and because we're not that big, one of those binary events can really move the needle. So we try to manage that a bit.

Our next question comes from the line of Sean Haydon with THC.

I just had a few questions on the Wealth Management business. So as you guys are beginning to form under 1 banner, has there been any churn of customers? Or have you seen any trends that you'd like to share with us?

I would say I have not seen any trends that are worth noting. What I think we've attempted to do better, and we're starting to do, is really solve the merits of the overall firm, and also some of the offerings of the overall firm. When we did our most recent bought deal, I was happy with the contribution of the retail brokers and participation and that's been a successful transaction. So to the extent we can have more successful transactions, I think we'll get more relevance. But the biggest thing that we see in that industry is we're -- they're facing a lot of the same things that we're seeing, which is a little bit more of a passive investor. And we see that in the institutional side. And we sit here and hope that at some point, stock picking matters and if we can get that across, and we can get retail investors to look at that a little bit, I think we'll be better off. But no meaningful churn or departures.

Okay. Great. And then I assume that gets lumped into the Capital Markets business overall, but would you mind just kind of, without getting too far into the weeds, just detailing what the economics of that business look like versus just the traditional broker-dealer?

So I think, look, it's a really important business, important for distribution, but the overall EBITDA in that business on a run rate basis is -- will likely be less than 10%. So we can focus on as much as you want and Phil can -- I don't -- I'm not even quite sure how much of that we've historically given. But the run rates aren't dissimilar to when we announced the deal, and so it was a $60 million kind of $70 million revenue business, and I think we said $5 million to $10 million types of EBITDAs, and they're still in and around those numbers. But I don't want to -- it's a significant part of our business, and I think it helps us win other business. But in the overall scheme of things, it's a little bit less than some of those other ones we mentioned.

All right. Great. And then I think I've asked this 4 or 5 calls in a row, but if you could just give an update on any progress in the mutual fund business? Where you see that heading for the rest of the year.

So -- it's performed great. And we're 4 stars, and I don't look at where we are relative to the rest of the funds incredibly often, I just know intuitively that we're outperforming or I think we're outperforming. But mutual funds, this is a call option, and it's gained assets periodically and every week money comes in. And my thought is -- or our thought is that we just keep pounding it, keep on putting good results. And if you can pick up a million here, a million there and you do it for a while and you get some momentum, it can generate a fair amount of money. But right now, it's not really costing us anything. And it's slowly but surely growing. But again, it's not something that's going to move the needle a ton.

(Operator Instructions) There are no more questions in the queue. I'd like to hand the call back over to Bryant Riley for closing comments.

Well, thank you very much. And once again, we appreciate the support of our shareholders. We appreciate the support of our vendors. And most importantly, we appreciate the efforts of everybody that works at B. Riley and who we -- we really are appreciative of and are excited to continue pushing along and reporting next quarter. So thank you. Thanks, Doug, and have a good day.

Before we conclude today's call, I would like to provide B. Riley Financial's safe harbor statements that includes important cautions regarding forward-looking statements made during this call.

During today's call, there were forward-looking statements that are not based on historical facts, including without limitations, statements containing the words will, predict, continue, forecast, expect, believe, anticipate, outlook, could, target, project, intend, plan, seek, estimate, should, may, and assume and similar expressions and statements. Such forward-looking statements include, but are not limited to, expressed or implied statements regarding anticipated second quarter earnings, plans for future dividend, future financial performance, our ability to increase our leverage and add value for shareholders, the effects of our business model, expectations regarding future growth, opportunities and acquisitions of United Online Inc., FBR & Co. and Wunderlich Securities Inc., our pending acquisitions and related actions, expectations regarding future transactions and the financial impact, size and consistency of returns and timing thereof as well as statements regarding the effect of investment in our business segments.

Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results, events or developments to differ materially from those expressed or implied by these forward-looking statements. Such factors include risks associated with expected cost savings or other benefits with respect to our pending and completed acquisitions, in each case within expected time frames or at all; our ability to consummate anticipated transactions and the expected financial impact thereof in each case within the expected time frames; or at our ability to manage growth; the potential loss of financial institutions, clients and the timing of completion of significant engagements. The risks included here are not exhaustive. Other risks and uncertainties are described in our annual report on Form 10-K for the year ended December 31, 2017, our periodic reports on Forms 10-Q and 8-K and subsequent filings with the SEC that we make from time to time. These factors should be considered carefully, and readers are cautioned not to place undue reliance on such forward-looking statements. All information discussed on this call is as of today, May 7, 2018, and B. Riley does not intend and undertakes no duty to update such information based upon future events or circumstances.

Further to this -- further, this conference call included the discussion of non-GAAP financial measures as that term is defined in Regulation G. The most directly comparable GAAP financial measures and information reconciling these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP are included in the earnings release, which is posted on the company's website at www.brileyfin.com.

Finally, I would like to remind everybody that a recording of today's call will be available for replay via a link available in the Investor section of the company's website.

Thank you for joining us today for B. Riley's Financial First Quarter 2018 Earnings Conference Call. You may now disconnect.