Piper Jaffray Companies (PJC)

PJC 
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Piper Jaffray Companies (PJC)

Q2 2009 Earnings Call

July 22, 2009 9:00 am ET

Executives

Andrew Duff – Chairman & Chief Executive Officer

Debbra Schoneman – Chief Financial Officer

Analysts

Steve Stelmach – FBR Capital Markets

Devin Ryan – Sandler O'Neill

[Jeff Burston – AH Visante]

Presentation

Operator

Welcome to the Piper Jaffray Companies conference call to discuss the financial results for the second quarter of 2009. 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 facts, 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 website at www.piperjaffray.com and on the SEC website at www.sec.gov.

Now, I'd like to turn the call over to Mr. Andrew Duff.

Andrew Duff

We are pleased with our improved second quarter results, which reflect a significant rebound in investment banking revenues, continued strong fixed income sales and trading, and important the operating leverage we have created in our business model.

Investment banking revenues increased across equity financing, public finance and financial advisory. Equity capital market conditions began to improve during the quarter. We were able to develop creative solutions and raise capital for or advise our clients in a number of successful transactions across every one of our focus sectors. The return on the five IPOs that we were participated in during the quarter is up an average of 41% [inaudible].

Also, higher fixed income sales and trading revenues were driven by solid client activity, favorable trading spreads and improved asset valuations. In addition, we are realizing the incremental benefits from the investments we have made over the past 12 to 18 months. We are particularly pleased with the momentum in our public finance business. We have an internal calculation for tracking economic e-market share for this business.

For the full year of 2008, our economic e-market share was 2.8%. At the end of the first quarter of 2009, our market share was 3%. At the end of the second quarter of 2009, it was 3.8%. This is the highest market share we have achieved since we began tracking it in 2004. This is also worth nothing that we are achieving these gains despite the non-investment grade segment of the public finance market stilling being essentially closed. This segment has historically generated a significant portion of our revenues. The public finance team has done a terrific job.

Finally and importantly, our second quarter performance clearly demonstrated the significant operating leverage we have created in our business model. Compared to the first quarter of 2009, our revenues increased 58% while our pretax operating income increased five-fold. We have held the compensation ratio to 60% and the non-compensation ratio dropped to 26% yielding a 14% pretax operating margin. We are committed to maintaining the positive leverage.

Looking ahead to the rest of the year, we are optimistic on the outlook for our public finance business. This business will improve further as the non-investment grade portion of the tax exempt markets begins to function. We are also reasonably optimistic on the outlook for our equity investment banking business. We are in active discussions with clients on many transactions, which largely are not reflected in a file backlog.

If markets are conducive to underwriting, as we experienced in the second quarter, we can effectively assist our clients in accessing the markets. We do think M&A will be challenged in the second half of the year as strategic buyers remain cautious and financial buyers are constrained by a lack of available financing.

Furthermore, as trading spreads tighten, we don't expect that we can sustain the robust fixed income trading profits that we achieved in the first six months of the year. However, we have added 19 senior professionals to this business over the past 12 months and we believe the business will perform well given this additional distribution capacity in trading expertise.

Now, I'd like to turn the call over to Deb to review the financial results in more detail.

Debbra Schoneman

In the second quarter of 2009, we generated net income from continuing operations of $11.6 million or $0.59 per diluted common share compared to a net loss of $1.5 million or $0.09 per diluted common share in the same quarter last year, and a net loss of $2.7 million or $0.17 per diluted common share in the first quarter of 2009.

Second quarter 2009 net revenues were $132.3 million up significantly compared to $97.7 million in the year ago period, and $83.9 million for the first quarter of 2009. Both investment banking and institutional brokerage contributed to the improved performance.

First I'll comment on revenues beginning with investment banking. For the second quarter of 2009, equity financing revenues were $23.3 million a significant improvement from the comparative period, although still below our historical quarterly averages. U.S., European and Asian activity contributed to the improved second quarter performance.

From a product perspective, we generated revenues across our product spectrum of IPOs, follow-ons, convertibles, private placement, pipes and RDs. Within the U.S. market there were 13 IPOs completed in the second quarter industry wide and we participated in five of them, including as sole book runner on Duoyuan Global Water, a leading China-based domestic water treatment equipment supplier.

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