Stifel Financial Corp (SF) 2007 Q4 法說會逐字稿

Good afternoon and welcome to the Thomas Weisel fourth quarter earnings results conference call. This call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Mr. Mark Fisher. Please go ahead, sir.

Good afternoon. This is Mark Fisher, General Counsel of Thomas Weisel Partners. Before Tom begins, I would like to remind you that today's call includes forward-looking statements, and these statements represent beliefs regarding future events, that by their nature are uncertain. Actual events may differ possibly materially from what is indicated or implied in these forward-looking statements, and we make no commitment to update them.

For a discussion of some of risks and factors that could affect those statements, please see our Form 8-K we filed with the SEC this afternoon, as well as the risk factors set forth in the annual and quarterly reports and proxy statements we have filed with the SEC. This audio cast is copyrighted material of Thomas Weisel Partners and may not be duplicated, reproduced, or rebroadcast without our consent.

So without further delay let me now turn the call ever to our Chairman and CEO, Tom Weisel.

Good afternoon and thank you for joining our fourth quarter earnings call. I will provide some opening comments. Then Lionel Conacher, our new President, will provide you with an update on the Westwind integration. David Baylor, our Chief Operating Officer and CFO, will then provide more details on revenue, expenses and earnings.

Our performance in the fourth quarter and the year was solid despite the market topping out in October. Many of the fourth quarter Investment Banking transactions were postponed to 2008. Having said that, the fourth quarter was the best revenue quarter of the year.

2007 was a year of investing in our future. The most significant of these investments was our acquisition of Westwind Partners, a transformational transaction for our firm. With the acquisition of Westwind we have expanded and diversified our platform and enhanced our growth prospects. The acquisition added energy and mining growth sectors to our brokerage and Investment Banking businesses and added full-service capabilities in Canada and Europe.

We also made significant investments in our Brokerage business to expand our potential customer base by opening sales offices in Chicago, Cleveland, Baltimore, London, and Zürich. These offices began to contribute revenue in both the third and fourth quarters.

We also began marketing our electronic trading platform and commission sharing soft dollar program in the second half of the year, which significantly increased our electronic trading client base. We also added a special situations team to provide clients with proactive, trading ideas that they could execute on our platform. These and other investments were made in our Brokerage business began to generate revenue and returns for us before the end of the year, enabling us to grow Brokerage revenue by 16% from second quarter to third, and additional 14% from the third quarter to the fourth quarter.

Even though the market softened, the fourth quarter was our best Brokerage quarter in the last two years. We expect these investments to continue to contribute to improvements in our Brokerage business in '08, as the momentum we experienced in the last two quarters has so far continued into this year.

Normalizing the tax rate, and excluding the investment spending of $9.4 million or $0.21 a share for our Discovery Research product, European sales expansion, and our Portland growth team, our earnings for the year would have increased 12% over last year.

In Investment Banking we continued to build client relationships for the future. Even though the capital markets will likely be slow in the near-term, we believe that we have built a new level of Investment Banking clients and revenue over the past two years that will form a solid base for future growth.

In 2007 we generated Investment Banking revenues from 55 new clients. We completed 32 initial public offerings compared to 27 and 18 in '06 and '05, respectively. We expect this group of new clients to be a source of future revenue for us as they continue to raise capital and engage in mergers and acquisitions.

The addition of Westwind will also add significantly to our client base. In 2007 we again ranked as the number one IPO underwriter for venture-backed companies. And we were involved in seven of the 10 best performing U.S. technology IPOs last year.

Our mission is to become the premier global growth focused investment bank. Our Investment Banking and Brokerage business now have more capability for revenue growth than ever. And once we emerge from the current difficult market conditions, we expect our earnings power to be stronger than it ever has.

In addition come our balance sheet remains strong, which includes approximately $400 million of book value, $240 million in tangible book value, and $110 million in cash and short-term investments after the Westwind acquisition and year-end bonus payments.

We have no exposure to the subprime problems or any derivatives of those problems. In this environment we will continue to aggressively manage our costs and strategically invest for the future.

Finally, the integration of Westwind and Lionel's addition as a leader on our management team has gone extremely well. As Lionel settles into his role as President of our firm, I plan on dedicating more of my time to build our Asset Management business. Our Asset Management business is entering an important period where our new initiative in Portland has performed well on our platform for over a year, and we are optimistic about the future of this business.

I will now turn the call over to Lionel to discuss further the opportunities for our new combined firm.

Historically, Thomas Weisel Partners has been a play on strong venture capital trends in technology, healthcare and consumer sector performance. By adding the mining and energy sectors through the Westwind transaction, and enlarging our geographic reach into five countries with over 15 offices, we are now closer to realizing our mission of being the premier global growth focused investment bank.

We will not be reporting combined results with Westwind until the first quarter, but to give you some context, Westwind's 2007 revenues were approximately $86 million. Of that, Investment Banking revenues were approximately $70 million. These results are in the range that we gave you on October 1 conference call, which was between $85 million and $90 million. Westwind's pretax earnings in 2007 were approximately $19 million.

Integrating Westwind into TWP is our primary focus in 2008. We expect to expand our trading in Canadian securities as our energy and mining analysts begin to make a greater impact on our U.S. and European accounts. And we will be hiring U.S.-based energy bankers and analysts to capitalize on Westwind's capabilities in Canada. In Europe, where we have already integrated our offices, we're combining our salesforces and marketing the combined Company's products and expertise. And we have already experienced early successes there.

We plan on executing on these opportunities, leveraging our current cost structure and expanded our banking footprint, which are the foundation for reaching our goal of revenues per employee of $1 million. If we can realize this target we should meet our long-term goals of net income margins greater than 10% and return on equity of 20%.

Entering 2008 the fundamentals of our technology clients remains strong and the demand for resources and commodities, which are the main drivers of our energy and mining clients, continue to grow. We think that we are well-positioned to take advantage of our diversified platform and growth capabilities once the market stability returns.

I will now turn the call over to David.

Our fourth quarter non-GAAP net income was $3.5 million, and our non-GAAP diluted earnings per share was $0.13. As we have in prior quarters, we report non-GAAP net income and diluted earnings per share by adjusting GAAP results for the ongoing amortization of equity awards we granted to employees in connection with our IPO. In addition, in 2007 we are adjusting for expenses related to the acceleration of our midyear retention bonuses and merger-related severance expenses.

Our total net revenues were $76.9 million in the fourth quarter of '07, the highest quarter of the year. This compares to $76.5 million in the fourth quarter of 2006.

Investment Banking revenues were $32.8 million in the fourth quarter compared to $37.3 million in the fourth quarter last year. We completed 28 transactions in both the fourth quarter of last year and the fourth quarter of this year. Our average revenue per transaction decrease slightly to $1.2 million in the fourth quarter this year, compared to $1.3 million in the year ago quarter.

Brokerage revenues were $34.8 million, the highest quarter in the last two years. This compares to $29 million in the fourth quarter of 2006. Asset Management revenues were $6.7 million compared to $9.3 million in the year ago quarter. The decrease in Asset Management revenues is mainly related to recognizing less private equity gains in the fourth quarter of 2007 compared to last year.

Our total Asset Management revenues increased 30% in 2007, driven by private equity gains, which are dependent on the fundamentals of companies in the healthcare and technology sectors, which we believe remains strong entering 2008. We're not, however, expecting the same level of private equity gains in 2008 that we experienced in '07.

A significant amount of our gains in 2007 were preferential returns based on previously waived management fees. In 2008 any gains would be primarily generated by our carried interest. Waived management fee gains are recognized before returns to investors, while gains from carried interests are recognized at the same pace as fund investors.

Compensation and benefits expense increased 8% in the fourth quarter to $72.2 million compared to $66.8 million in the fourth quarter of 2006. We increased our compensation ratio to 58.6% in the fourth quarter from 55.7% in the fourth quarter of '06. Our compensation ratio excludes amortization expense related to our IPO equity awards from our compensation expense, and excludes private equity gains from our revenue.

The compensation expense for the fourth quarter of 2007 also excludes $24.8 million of non-recurring compensation expense related to the acceleration of midyear retention bonuses and merger-related severance expenses. Since the closing of the Westwind merger we have proactively reduced the number of employees in our combined firm from 750 to 700.

The increase in our compensation ratio for '07 is in large measure due to the disappointing performance of our Discovery Research product, which we recently announced we have decided to discontinue, our Portland growth team initiative and our decision in July to expand our sales force in Europe. As Tom mentioned, we estimate that these three reinvestments reduced our pretax net income by approximately $9.4 million, and reduced our diluted earnings per share by approximately $0.21 for the full year in 2007.

Our non-compensation expenses were $28.7 million in the fourth quarter compared to $25.6 million in the fourth quarter of last year. Brokerage expenses increased $300,000 due to higher trade, clearance and execution fees associated with higher volumes from the year ago quarter. Communications and data processing expenses increased $1.1 million from the fourth quarter of last year, because we had more employees in 2007 than in 2006, and due to higher connectivity expenses related to opening new offices in '07.

Marketing and promotion increased $1.6 million in the fourth quarter of '07 compared to the year ago quarter, due to increased international travel and entertainment expenses related to consummating the Westwind transaction and opening our new offices in London and Zürich.

Occupancy and equipment expenses increased $1 million from the fourth quarter of '06, mainly due to higher operating expenses at our New York office and additional rent expenses for new offices in the Midwest and Europe.

Other expenses decreased $600,000 in the fourth quarter compared to the same quarter last year due to a decrease in professional fees, such as tax, audit and consulting fees.

I will now turn the call back to Tom, who will provide you with some further detail on Investment Banking revenues.

In the fourth quarter we generated $33 million in Investment Banking revenues. This did not meet our expectations. A large number of our capital raising and M&A transactions scheduled for the fourth quarter were postponed due to market conditions. The fourth quarter was led by capital raising revenue, which were up 19% to $26 million compared to the fourth quarter of '06. We completed 14 IPOs, 8 follow-ons and two private placements. In addition, we completed four M&A transactions, generating $6 million in revenue, which was down compared to M&A revenues generated in the year ago period.

Notable fourth quarter transactions included the sole-book management of Internet Brands' IPO, the joint-book management of Constant Contact's IPO, the joint-book managing of Obagi Medical's follow-on offering. We also were the sole agent on the $69 million private placement for London Bay Capital, and a $30 million placement for AngioScore. In addition we advised on Symyx Technologies and its acquisition of MDL Systems. And we advised on Applied Precision in the sale of its semiconductor business to Rudolph Technologies.

In the fourth quarter our Investment Banking revenue mix by industry was largely led by technology, which generated $16 million of revenues, Health care with $9 million, alternative energy with $4 million, which was a new group we established at the beginning of '07, and consumer with $4 million. We are pleased to see momentum in our alternative energy space continues into this year.

Full year '07 versus '06 M&A revenues were $50 million, a 60% increase compared to '06. For the same time period capital raising revenues were $78 million, a 17% decline.

Not including Westwind, our backlog is down 30% compared to this time in the previous quarter, mainly due to the current unfavorable market environment. We define backlog as our filed, announced, and engaged transactions at the beginning of the quarter compared to the beginning of the prior quarter.

On file we currently have 20 IPOs, for which we are book or lead on 9. Additionally, we have one announced M&A transaction. These numbers include the backlog from Westwind.

In conclusion, with the acquisition of Westwind, the expanded distribution platform, and the investments in our growth initiatives, we believe we have built a solid competitive base of revenue and clients to weather any difficult environment, and we will flourish and grow once the future for the economy is more certain.

Using a normalized tax rate, and excluding our investment spend, that base includes revenue of approximately $200 million in Investment Banking, a stable and growing Brokerage operation, and an ongoing operating non-GAAP earnings base of $1 per share for our combined companies in '07. This would yield a combined net GAAP ROE of 9%. We expect our investment pending to turn positive in '08.

This concludes our comments this afternoon. Thank you for standing the time with us. We will now open the call for questions.

(OPERATOR INSTRUCTIONS). Rich Repetto, Sandler O'Neill.

I guess the first question is the timing -- you know, deals got pushed back from 4Q, 1Q looks very soft given the market conditions now. How would you suggest we look at, not only the quarter, but maybe the first and second half of the years, as far as Investment Banking goes?

I know that you've got a very good capital markets team, and you should ask them. Right now the market one day loves the capital markets and the next day it doesn't. Today, for instance, the NASDAQ was up 2.3, the S&P up 1.3. The leadership came from tech, telcom and energy. But just the reverse could be true tomorrow.

I frankly do not have enough of a crystal ball that tells me, A., whether we are in a recession and, B., how pronounced and long it could be. Those are going to be the determinants on when and if the capital markets start to turn back on.

You do have two interesting data points after the close today. There is a medical instrument company going public and a security software company, so we will see if those two get well received. These are really the two deals that are pretty much in our strike zone being done by other competitors. That could very well give us some clues on whether or not higher quality companies can do public offerings in the current environment.

That is fair. Understood. But I guess at 1Q at this stage we're looking at a dramatic adjustment here, given the market conditions.

Totally agree.

Then I think I know the answer to these questions too. But I guess, David, if we -- I was going to ask compensation ratio guidance for '08, non-comp ratio guidance any way -- any direction you can point us?

Our comp expense for '07 was 58% for the year. And that is our goal for '08. In terms of non-comp expenses, I think that our non-comp expenses this year, given what is likely to be the capital markets environment versus the brokerage environment, will probably remain relatively constant as a percent of revenues.

Could you say that -- just the last part one more time.

I think from a non-comp perspective, I think that given the fact that, as we mentioned on the call, our Brokerage revenue is showing significant progress. As you mentioned, the Capital Markets environment are challenged, as you know. More non-compensation expenses come along with Brokerage revenues than with Banking revenue. Based on that, I would model your non-compensation expenses to remain a pretty similar percent of revenue in '08 as in '07.

And then I guess the last question, you gave the metrics for Westwind, $86 million in revenue would back into $67 million in expenses. That seems a lot -- I believe that is a lot better than -- it seems like expenses came down in the second half for Westwind, if I got this right. Is that fair?

It is Lionel speaking. Yes, that is probably fair if I look back on the year. We had a higher compensation payout in the front end of the year than we did in the back end of the year. And so the differential would have been all compensation related.

Got you. Because I am looking at the proxy, it looks like $37 million or so in the first half.

Yes.

(OPERATOR INSTRUCTIONS). Lauren Smith, KBW.

Could you give us a sense, you had said that headcount had been reduced to 700 from 755 by design. Could you just give us sort of a flavor for what areas or businesses of the firm?

Secondly, given the current environment, which I think we will all recognize as pretty poor, do you feel that this headcount level -- or said differently, do you feel that you would have to entertain paring back even further if we don't have some, at least intermediate term rebound?

Then I guess just lastly also in headcount, just give us a sense of maybe attrition. Now that you have closed the acquisition, have you had any meaningful departures that you would not have wanted to see otherwise leave the firm?

I will try to remember all three of those. The first one was in terms of the number of employees, where did they come from. The majority of employees were from our Discovery Research operation in India. The remaining, say 20 or so, were evenly split between Banking, Research and Brokerage.

So the lion's share being the dismantling of the research effort in India?

That's correct. Correct. Your next question is, given the current -- Tom wants to answer your next question.

Just on the intermediate term, we would have no plans to reduce our headcount. I think that we've got a presence in the verticals that we're addressing, whether it is on the Brokerage or Banking side. And unless things materially change from where we are right now, we will spend through the cycle, and would have no plans to reduce our headcount from here.

Then your last question, we have one departure that has announced is leaving that we would not have liked to see go. Although I'm pretty impressed with the potential replacements that we have been interviewing for that one person. But other than not, the answer is no.

Just lastly, what area of the firm what is person in, in what department? Was it banking or research, sales or trading?

I would rather not. It hasn't been announced yet, so I'd rather not.

Fair enough.

I think it is just important to note that the departure is not going to a competitor, it is going to a client. And then just on the headcount side of things, one of things that we're looking at very, very closely right now is in this market environment, and with what a number of the other investment banks are doing in terms of headcount reductions, we look at this as a great opportunity for us to continue to try and upgrade. And so while, with regard to what Thomas said in terms of maintaining headcount, our goal will be over the course of the next three to six months to continue to try and upgrade our personnel as opportunities present themselves.

So the net net number may not change, but we might see some just movement?

Yes. As I'm sure you guys are seeing as well, there are some very, very talented people on the street right now that have been let go of their respective firms for bigger reasons than their specific performance within those firms. We just view that as being a wonderful opportunity.

One last question that stems from that, given clearly the sharp reductions in fixed-income, unstructured product departments at the big firms, that is not currently part of your mix of business. Is there any opportunity that you see that you, again, given the talent pool available, that there might be something to do on that front that might fit well within the franchise?

We are pleased we're not in those businesses. Have absolutely no intention on being in those businesses. Many of those businesses are commodity capital intensive businesses that are just the exact opposite of what we're looking for.

Frankly, the growth prospects in our current sites, growth verticals, is just so great, not just in the United States, but now we've got a nascent activity in Europe, a lot of wood to chop in Canada, and then looking and applying those verticals over into India and China. We would not look at these heavy capital intensive products -- debt products in the foreseeable future.

Rich Repetto, Sandler O'Neill.

Back in the queue already. Tom, you mentioned a little bit about you might change your -- a little bit your role or your focus being up in Portland more. I guess could you give more detail on that?

Sure. I am currently acting as the CEO of our Asset Management business. Not only do we feel like we are at an inflection point on the Portland business and need to raise some substantial assets there, but we're looking at other Asset Management products that are either the small and MidCap value international, emerging markets. But we're also looking at a number of alternative asset areas.

We're looking at a multi-strategy debt fund, as well as a fund of funds in the hedge fund area. So basically building out the strategy and implementing this strategy and raising some substantial amount of assets is something that I'm going to spend, along with a couple of other partners here, a lot more time. I think the fact that very quickly the Brokerage and Banking operation are going to be reporting directly to Lionel it is going to give me more time to spend on the Asset Management side.

Got you. Last question, David, just some numbers. Just so we can check to make sure we have got the right numbers here, can you just give me the pretax income and tax on a non-GAAP basis? It is $3.5 million net on non-GAAP.

For --?

For the quarter?

Oh, for the quarter. I'm sorry. You're looking at the press release?

I guess we could back into it, but we were still unsure on a pretax -- like you give us the adjustments on an after-tax basis most of the time. I am just trying to see what the non-GAAP --.

Let me give you those. The pretax adjustment for the severance payment and the retention is $24.8 million. And the pretax number for the IPO [R2] expense is $500,000. I'm sorry, I didn't understand what you are asking there.

The reason that is lower than historic quarters is because we had a higher attrition rate then we had originally projected, and so we trued that up at the end of this year. So rather than being $1.1 million it was $500,000.

We have talked before about 42%, I believe, tax rate going forward. Is that still fair?

I think if you look at our marginal rate in the U.S., that is right. But that is not the marginal rate in Canada. The marginal rate in Canada is in the high 30s, and so on a blended rate we would expect our tax rate to be 38 or 39%, depending on the mix of business.

At this time we have no further questions. I would like to turn the call back over to today's presenters for any additional or closing comments.

We thank you for attending, and look forward to talking to many of you later. Thank you. Bye.

That does conclude today's conference. You may disconnect at any time.