Piper Sandler Companies
Q3 2007 Earnings Call Transcript

Published: 17 Oct 2007

[Operator:]

Good morning ladies and gentlemen, and welcome to the PiperJaffray Companies' Conference Call to discuss the financial results for Q3 of 2007. During the question-and-answer session, Securities industryprofessionals may ask questions to management. The company has asked that Iremind you that statements on this call that are not historical or currentfacts, including statements about beliefs and expectations. They are forward-lookingstatements that involve inherent risks and uncertainties. Factors that could cause actual results to differmaterially from those anticipated, are identified in the company's reports onfile with 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 like to turn the call over to Mr. AndrewDuff. Mr. Duff, you may begin your call.

[Andrew Duff:]

Thank you and good morning. Thecapital markets conditions in the third quarter were extremely challenging, andas a result we recorded a disappointing financial performance. Let me be clear,our business is not focused on the troubled credit markets areas, specificallysubprime mortgages and LBO loan commitments. That said, the fall-out from thesemarkets created a very challenging capital markets environment. As a result,nearly all of our businesses were negatively impacted, including equity andtaxable debt financings, mergers and acquisitions, and sales and trading. However, we believe the negativeimpact to our business was largely concentrated in the third quarter. Ourcurrent deal pipelines are strong, and we believe the current environment ismore conducive to capital markets activity. For example, at the end ofSeptember and in early October, we co-managed IPOs for Athenahealth, ChinaDigital TV, and Compellent Technologies. All deals are priced above thefiling range, and they are currently trading at significant premiums of 40% andmore than their offered price. We believe this indicative of a more receptive investorappetite, and bids us well for a more positive environment for the fourthquarter. Despite the difficult conditionsin the quarter, we continue to execute against our growth strategy. Wesuccessfully completed our acquisition of FAMCO in the third quarter, and inearly October, we closed the Goldbond transaction. We are pleased with theperformance of FAMCO, and we expect our newly expanded operations in Asia to positively contribute to our fourth quarterresults. Both of these businesses will help to broaden our capabilities, anddiversify our revenues into future quarters. Now, I would like to turn it overto Tom Schnettler to review the financial results in more detail. Tom?

[Tom Schnettler:]

Thank you, Andrew. As Andrew reviewed,the adverse conditions in the capital markets significantly impacted ourresults in the third quarter, particularly the investment banking revenues. We generated net revenues of$92.9 million, a decline of 20% from the third quarter of 2006, and a declineof 24% from the second quarter of 2007. Net income from continuing operationswas $4.8 million, compared to $9.5 million, in the year-ago period at $10.4million in the second quarter of 2007. The difficult capital marketsconditions were particularly apparent in significantly lower equity financing.Healthcare and consumer, two of our core sectors, were particularly hard hit.Year-over-year, the number of healthcare and consumer financings in theindustry dropped 20% and 50% respectively. Quarter-over-quarter, the number ofhealthcare and consumer financing both declined over 70%. Piper Jaffray neared these trends,and our revenues reflected the steep industry decline in activity. Equityfinancing revenues were $18.2 million, down 42% compared to the year agoperiod; and 55% compared to the second quarter. However, currently our U.S. equitybacklog stands at 22 transactions, the highest level year-to-date. We are leador co-lead manager on 11 of these deals in our backlog, and all of our sectorsare 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 thedownturn in market conditions, reasonably well. Public finance revenues increasedslightly year-over-year, as higher average revenue per municipal transactionmore than offset fewer completed transactions. Public finance revenues declined,compared to the sequential quarter during which revenues were at, or nearrecord levels. Due to difficult marketconditions, our taxable debt financing revenues, including high yield, werenegligible in the third quarter. Taxable financings represent a minoritycomponent of our overall debt financing revenues. However negligible revenuegeneration 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 ourM&A business as a result of the difficulty in the credit markets. For example, we were the buy-sideadvisor to Lone Star Funds in its acquisition of Accredited Home Lenders. Thistransaction was renegotiated during the quarter, and as a result, the closingwas delayed from the third quarter to the fourth quarter. Now let me turn to sales andtrading. 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 marketvolatility, we realized increased trading losses in our equities business. We did experience higher tradingvolumes in July and roughly through mid-August. However, volumes significantlytapered off, ahead of the Federal Reserve meeting in mid-September. In addition,due to more difficult market conditions, we realized higher trading losses inhigh-yield and structured products, our taxable fixed income, and our fixedincome 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-compensationexpenses were $32.5 million, or relatively flat to the third quarter of lastyear. Non-compensation expenses weredown 9%, compared to the second quarter of 2006, mainly driven by loweroccupancy costs and decreased legal fees. The sharp drop in revenue resulted innegative operating leverage, and our pretax operating margin for the quarterwas compressed to 6.5%. Turning to discontinuedoperations. In the third quarter of 2007, we reported a loss of $456,000,after-tax. The loss included cost primarily related to decommissioning aretail-oriented back office system. The decommissioning of the systemwas completed on schedule in the third quarter, and we do not anticipate thatwe'll incur any additional costs related to this system. Finally, in early August wecompleted the repurchase of $70 million or 1.4 million shares of our commonstock. The average repurchase price was $48.87. We've now completed the $180million share repurchase program, authorized by our Board of Directors, at thetime we closed the sale of our private client services business in August of'06. That concludes our formal remarks.Now, Andrew and I will be happy to answer your questions.

[Jennifer Olson-Goude:]

Operator, can you queue the linefor questions please.

[Operator:]

(Operator Instructions) Yourfirst question comes from the line of Lauren Smith.

[Lauren Smith:]

Hi. Good morning.

[Tom Schnettler:]

Good morning, Lauren.

[Lauren Smith:]

Two questions, one could you talkto the tax rate, and is there anything there of note that drove it considerablylower than prior quarters?

[Tom Schnettler:]

Yeah, the tax rate on ayear-to-date basis, Lauren, is now 31.7%. I think this is indicative of therate we would see going forward. The low rate in the third quarter was reallyrelated to bringing our year-to-date rate to that level. That level of tax isreally related to the higher proportion municipal interest income to totalincome.

[Lauren Smith:]

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

[Tom Schnettler:]

Yes.

[Lauren Smith:]

Okay. And then with respect tostock repurchase, you completed the outstanding remainder of the 180,particularly given where the stock price is. I mean, that’s what we should be thinking about. Would you be likely toreload your repurchase authorization?

[Tom Schnettler:]

We don’t intend to see theauthorization from the Board at this time for further repurchases. We arelooking at a number of opportunities to deploy capital in the business, and wewould intend to go forward with that strategy.

[Lauren Smith:]

Okay. That’s all I have for themoment. Thank you.

[Tom Schnettler:]

Thanks, Lauren.

[Operator:]

Your next question comes from theline of [Alex Blaustein].

[Alex Blaustein:]

Hi guys. It’s Blaustein. Howare you?

[Tom Schnettler:]

Good morning.

[Alex Blaustein:]

I have couple of questions aboutFAMCO. So there are basically two weeks, as far as I understand in the quarter,included in FAMCO results. Is thatcorrect?

[Tom Schnettler:]

Yes.

[Alex Blaustein:]

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

[Tom Schnettler:]

Yeah. The majority of that wouldbe FAMCO.

[Alex Blaustein:]

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

[Tom Schnettler:]

Yes. It was actually $8.3 billionat the time it closed. There was one significant client who did not provideconsent to the acquisition. So the cash payment of the close was adjustedaccordingly, and those are indicative balances for the end of the quarter.

[Alex Blaustein:]

Okay, fair. Thanks a lot.

[Operator:]

(Operator Instructions) Your nextquestion comes from the line of David Trone.

[David Trone:]

Good morning. You guys had mentionedthat there were some high yields in the structured product losses. Is there anyway you could quantify that? And do you mean losses -- characterize, what doyou mean by losses. Do you mean markdowns?

[Tom Schnettler:]

I mean that in some of the inventorypositions that we were carrying in support of our high-yield and structuredproduct trading activity, yes. We took some markdowns against thoseinventories.

[David Trone:]

Okay, and can you quantify it?

[Tom Schnettler:]

We don’t provide that on a kindof product-by-product basis.

[David Trone:]

Okay, thank you.

[Operator:]

There are no further questions. Iam sorry, we do have a question. I think we have a question from the line of [LizSkinner].

[Liz Skinner:]

Hi, I was wondering, youmentioned that there are a number of opportunities to deploy capital into thebusiness. Could you give vent to what others you are looking at?

[Andrew Duff:]

This is Andrew. We are continuingto look at opportunities consistent with our strategy, where we can addadditional product capabilities, new industry sectors or expand our geographicfootprint. And the two that we have accomplished recently are pretty indicativeof the opportunity to get a bigger footprint in Asia,and to re-enter the asset management business. Not to mention ongoingdevelopment of a number of [principaling] activities. So we do see the need foradditional capital to deploy in these strategies. And I would remind you thatour balance sheet remains unlevered. So we believe we have the capacity to getthe capital we need to develop these strategies.

[Operator:]

(Operator Instructions). Thereare no further questions.

[Andrew Duff:]

Okay, well, let me just make aclosing comment. We continue to believe we are demonstrating solid executionover the last several years against our aggressive growth strategy. We areundeterred by the temporary market upsets, and we’ll continue on the coursethat we've been on for the last several years. Thank you all for joining ustoday.

[Operator:]

This concludes today's conferencecall. You may now disconnect.