JMP Group LLC
Q3 2015 Earnings Call Transcript

Published: 23 Oct 2015

[Operator:]

Welcome to JMP Group's Third Quarter 2015 Earnings Conference Call. Please note that today’s call is being recorded. [Operator Instructions] I'll now turn the call over to Andrew Palmer, the company's Head of Investor Relations.

[Andrew Palmer:]

Good morning. Here with me today are Joe Jolson, JMP Group’s Chairman and Chief Executive Officer; and Ray Jackson, the company's Chief Financial Officer. We're joined by Carter Mack, President of JMP Group; and Mark Lehmann, President of JMP Securities. Before we get started, I'll note that some of this morning's comments may contain forward-looking statements about future events that are out of JMP's control. Actual results may differ materially from those indicated or implied. For a discussion of the uncertainties that could affect the company’s future performance, please see the description of risk factors included in our most recent 10-K. With that, I'll turn things over to our Chairman and CEO, Joe Jolson.

[Joe Jolson:]

Thanks Andrew. Our third quarter results were disappointing, but not entirely unexpected given the sharp sell-off from smaller cap U.S. equities during the latter half of the period, which hurt our investment banking business and led to modest losses on net invested capital and our funds versus our expectation of more normalized returns. For the quarter, our taxable operating subsidiaries produced all of our operating earnings, while our corporate net income line, which is net investment income less corporate costs, was essentially breakeven. Our operating return on equity was disappointing under 4% for the quarter, but for the latest 12 months is still roughly 12%. I’ll have Ray Jackson touch on some financial highlights before I continue. Ray?

[Ray Jackson:]

Thanks, Joe. Adjusted net revenues which exclude certain non-cash items and non-controlling interest were $27.1 million, down from $39.7 million for the third quarter of 2014. Decline was primarily due to year-over-year decreases of $3.3 million in hedge fund incentive fees and $5.1 million in investment banking revenues. Operating net income was $1.3 million or $0.06 per share, down from $3.4 million or $0.15 per share a year ago. The nine months ended September, operating EPS was $0.50 compared to $0.52 for the first nine months of 2014. As for expenses, we consider our compensation and non-compensation ratios. Our adjusted compensation ratio excludes two items

[Joe Jolson:]

Thanks Ray. After a productive first half of the year, JMP Securities was challenged by market volatility that led to a sequential decline of 56% in equity capital markets activities across Wall Street during the third quarter. As a result, JMP Securities’ adjusted net revenues were $18 million for the quarter. For the nine months ended in September, adjusted net revenues fell 13% to $73.6 million from a record level of $84.9 million a year earlier. It’s important to note that $73.6 million would be the second highest total in our firm’s history. For the first nine months of this year, JMP Securities contributed $0.28 to operating earnings with an operating margin of 13.8% versus $0.40 in the same period last year with an operating margin of 17.6%. For trailing 12-month period, JMP Securities produced a taxable return on equity of 35.4% with minimal financial leverage. Going into September, we seem reasonably well positioned to deliver on a good quarter, but the third quarter nearly always depends on post Labor Day business conditions. In this regard, we were negatively impacted by the sharp selloff in smaller-cap equities and in particular even sharper selloff in life sciences and other momentum stocks. September was very tough month across Well Street, impacting us primarily through lower investment banking revenues, which also led to negative operating margin leverage and a small unrealized loss on our invested capital in our hedge funds versus our normal expectation of profits of $0.05 to $0.10 a share per quarter. We were also hurt during the quarter by the postponed IPO of RiverBanc Multifamily Investors, a sponsored fund in which we have an economic interest. Our portion of that deal cost was roughly a penny per share. During the recent draw decline in ECM activity, JMP Securities held its own in terms of its position among equity underwriters. Over the last 12 months, the firm has captured 106 basis points of U.S. equity underwriting fees paid in our four targeted sectors and has served as an underwriter of approximately one in every eight initial public offerings across all sectors. This is important to note that the number of IPOs in the last 12 months was 144 compared to 293 in the same period in 2014, substantial decline. We’re acutely focused on winning more high margin IPO mandates, book running more transactions whether IPOs or follow-ons and increasing our economics when we act as a co-manager. Additionally, we continue to focus on winning and closing more higher margin M&A and debt transactions. Shifting to asset management

[Operator:]

[Operator Instructions] And our first question will come from the line of Alex Paris with Barrington Research.

[Alex Paris:]

Tough third quarter but as you said, not to a surprise given the equity markets and the reports of some of the other investment banks out there. My question is first and foremost aimed at investment banking. So, I'm assuming you did 11 deals in the quarter versus 27 in the quarter preceding and 26 deals a year ago. Can you quantify to some extent or in some way what got postponed or withdrawn? And then related, what's your outlook in that arena for the fourth quarter or the month of October?

[Joe Jolson:]

Yes, I think that I can give you some rough numbers but I think I pointed out many times that pipeline is something we obviously track but closings are obviously what's important and what shows up in revenue. So, going into Labor Day, we had roughly another -- I'd say 5 million to 8 million maybe at the high end of that range of a public company financings that we thought would happen by the end of September that didn’t. And it's unclear -- none of them were canceled. So, it's unclear whether those go forward or not this quarter. We have all witnessed the firming up in the last four weeks of the equity markets which is a good sign, although the life sciences space has continued to sell off which as you guys know is a larger part of our business than the overall market, so time will tell. It's literally few weeks into the quarter, so we will see what happens, Alex. We also have been saying every quarter that we have a pretty good pipeline on the M&A side and each quarter we don’t show it in the revenue side. And that's continuing and we are hoping to close some of that by year-end as well.

[Alex Paris:]

And then so I hear you on the life sciences side, what does the -- of the $5 million to $8 million in fees that were delayed or pushed out, what were life sciences; were there any other sectors represented in that postponement.

[Joe Jolson:]

I don’t have a breakout of that on the call here; we can get back to you on that. But just if you just kind of look at the mix typically of our ECM business, roughly, I'd say half of it plus is life sciences. So, I would assume that it's similar to what got pushed out.

[Alex Paris:]

And then on the brokerage side, you had a slight decline in brokerage revenues, mid-single-digit sort of decline, $6 million, in line with our expectation, in line with the others. It seems the increased volatility didn’t result in increased volume at least for institutional equity brokers. How do you measure your market share; do you think you maintained market share, took market share; and has that improved in October?

[Joe Jolson:]

The numbers that we get on the brokerage side for market share are lagged by 3 months from the bottom. [Ph] So we won't actually know those numbers probably until January or something. The numbers I saw for the second quarter showed us flat to slightly higher market share year-over-year, if that helps, as you know in that regard. I should point out that like most firms, we report the net brokerage revenues and don’t really break out the components. And one thing that's happening year-over-year in that line that’s causing down draft a little bit is the comparison in our sales and our net commissions on the convert side. We had a pretty active 2014 on the convert side with a couple of situations that haven’t -- hasn't so far recurred this year. And so part of that decline that you see which is as you point out is in a big decline is related to the tougher comp on the convert side. I think on the equity side of the business, we’re kind of flattish, maybe slight down by a couple of percentage points, so just to point that out. And I think that obviously it’ll make easier comps in 2016 on the convert side, if activity picks up there. Hopefully that's helpful. We are still hoping by the fourth quarter year-over-year that we’re flat to up in what we report in the brokerage side. But I've been saying that as the year has gone along and hasn’t happened but we’re still expecting that to happen.

[Alex Paris:]

And then just bookkeeping sort of question, the tax rate is influenced by non-taxable income as well as the taxable side. The tax rate was -- obviously is a credit because of the GAAP loss, but it was -- I still expected an expense given that the corporate side was -- I guess I didn’t; it was a loss actually. I take that back. How should I think about taxes for the full year?

[Joe Jolson:]

I think that taxes are really difficult thing for us to predict too. But I think that the -- we’re assuming in our operating earnings that our tax rate is 38% and historically it’s run less than that. So, we think that's a pretty conservative assumption that we use for our operating earnings. Obviously the PTP earnings have some expense in there of a public company, but anything above what you need for a public company, we push through the old JMP Inc. And that might be the difference that you are having a problem in predicting taxes because that reduces the tax rate in the Inc. right, versus what we show as -- three businesses after tax earnings. So that's probably the delta but that's a consistent delta; each quarter it’s probably $0.06 or $0.07 a share each quarter of after expenses in the Inc. if that helps you in terms of modeling that.

[Alex Paris:]

Yes, that's helpful.

[Joe Jolson:]

Up or down a lot, but it’s consistent, but that’s why that tax -- I had the same question when I saw the numbers, why we didn’t get a bigger tax recovery than what we did because -- and that's why.

[Operator:]

The next question will come from the line of Doug Doucette with KBW.

[Doug Doucette:]

Just a couple of questions, first on the expense side, I was wondering if you could just provide the driver to the growth on the non-comp expenses. Is that just largely like a growth initiative business type expense or any color you could provide, would be appreciated.

[Joe Jolson:]

I’m not sure what -- non-comp expenses in dollars…

[Ray Jackson:]

670,000 quarter-on-quarter from ‘15, that’s going. [Ph] And of that Doug, a chunk of it was in the others line which is CLO -- primarily CLO admin, so we had a new CLO in the fourth quarter of ‘14 almost, so it wouldn’t have been present in Q3 ‘14. And then the other part of it is I think primarily our life sciences conference; [ph] we had a higher headcount this year versus last year that increased the cost of that conference but otherwise it’s only 671,000 higher year-on-year.

[Doug Doucette:]

And then on the 2Q call, I think you guys mentioned you’re keeping capital at the subs for growth purposes and acquisitions; is there any update you could provide on any of those initiatives?

[Joe Jolson:]

Well, we have, as Ray mentioned, I think $0.15 of retained earnings year-to-date and our intention is to retain that. I mean we may distribute a couple of pennies with that because we don't want to necessarily return capital if the -- depending on the fourth quarter PTP earnings. But longer term, our intention is to retain the bulk of that if not all of those earnings for growth, just to be clear now. Obviously there were acquisitions that we couldn’t be talking about it. So I’m not sure exactly what you want me to comment on that part. But we look at stuff all the time. And I think we are hopeful at sometime in the next 12 months that there is something interesting to talk about, but thus far there isn’t.

[Doug Doucette:]

And then I guess just staying in that vein, is there any specific capabilities that you are targeting to add to the platform or is the acquisition -- potential acquisition rather going to be more optimistic --- sorry, opportunistic?

[Joe Jolson:]

No, I think that we would look at related businesses, but typically the kind of stuff that we look at is in the businesses that we’re already in. And we compare it to where our stock is selling in terms of buying back stock. And it’s a tougher comparison bar to jump over today unfortunately with the selloff in our stock not that it was an easy comparison before that, because we thought our was undervalued, but this makes that a little bit tougher. And we compare it to building it organically over a three-year period in terms of evaluating it, kind of things that we typically look at or expanding our merger and acquisition business, M&A boutiques, potentially another research boutique in an area that we are not currently in, but we think is attractive longer term in terms of the areas that we would like to be in and in asset management in typically other kind of related strategies in the alternative asset world to what we’re already doing in terms of building out that business. And we see a lot of things. We usually don’t pursue many after seeing them. But I think that downturns and I don’t know for in one yet other than it was a one quarter downturn for the markets. But if we’re in a little bit longer period of this or usually these are the periods where you get the best opportunities. So, I think now that my fund was closed in July, one of the reasons to do that was to focus some more on some of these strategic growth initiatives. And Carter Mack, our President spends a decent chunk of his time evaluating these things as well. So, we have couple of senior guys and a few other senior people focused on these efforts, JMP Securities as well as in asset management.

[Operator:]

And at this time, there are no further questions. I’ll turn the conference call back over to management for closing remarks.

[Joe Jolson:]

Yes. Thank you guys for continuing to -- you have an interest in our company. And while we weren’t very happy with this quarter’s results, we were pleased that we were able to have another quarter of profitability. And we’re looking forward to hopefully a bounce back in the fourth quarter here. Thank you.

[Operator:]

Thank you for participating on today’s conference call. You may now disconnect.