Piper Jaffray Cos Earnings Call Nuggets: Fixed Income Trading and Operating Margins

Piper Jaffray Cos (NYSE:PJC) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Fixed Income Trading

Joel Jeffrey – KBW: A question on the fixed income trading side of the business. If muni prices kind of stabilize here or don’t move one way or the other meaningfully for the remainder of the quarter, just from trading volume alone, do you guys think you can get back to that sort of $25 million per quarter in revenue you talked about in the past as a run rate?

Andrew S. Duff – Chairman and CEO: Yes we do. There might be a slight change in mix between flow and trading, but we do anticipate that we will do that.

Joel Jeffrey – KBW: Can you give us a sense on typically how much of your business is flow driven and how much is driven by sort of marks on the portfolio?

Debbra L. Schoneman – CFO: So, Joel, I would talk about that in two – maybe in customer flow versus strategic trading, because they are marks on the portfolio that can happen in both of those businesses. So if you think about our customer flow business, which has been and will continue to be the majority of the revenues, we do hold also the majority of our inventory in that side of that business. We did experience trading losses, again, as we talked, for both realized and unrealized on that side of the business, again, given everything we’ve talked about with the increase rates and increase in spreads. Then on the strategic trading side, we did also experience challenging trading conditions, but on that side our net revenues were positive, just significantly lower than they had been in prior quarters.

Joel Jeffrey – KBW: Thinking about the advisory business, are we sort of through this hangover we’ve had in middle market M&As that came from the pull forward in the fourth quarter?

Andrew S. Duff – Chairman and CEO: We feel like we are, if I can just speak to our backlog and the activity we’ve got going on, exactly. It was sort of a Q1/Q2 event with a very substantial Q4 and we expect starting in Q3 to have a strong rebound.

Joel Jeffrey – KBW: Are there any areas in specific that you’re seeing the most strength?

Andrew S. Duff – Chairman and CEO: You know what, it’s really across our four industries, and very excited again to have addition of the (indiscernible) too now.

Joel Jeffrey – KBW: Then, I guess, just lastly for me, can you give us a sense – how much cash do you currently have on the balance sheet?

Debbra L. Schoneman – CFO: It’s just so you understand how we manage the business from a cash perspective, is we’re a net borrower every day to finance our inventories. So, the cash we hold is typically for reserves required for customer deposits or other capital requirements in various legal entities. So, I may have where we are at the end of quarter here, if you just give me one moment. We were at the end of June about $69 million and that excludes $27 million which was held aside and segregated for regulatory purposes.

Operating Margins

Michael Wong – Morningstar: So, after pruning some underperforming businesses and acquiring some higher margin one’s recently, do you have any updated overall guidance for the Company’s compensation ratio or a normalized operating margin?

Debbra L. Schoneman – CFO: So from a compensation ratio, in particular this quarter was higher, as I have spoken to, given the trading losses. We had previously guided a 60% to 61% target. Actually with the acquisition of SBU there are some retention related compensation items, so that target we see going forward is being 61% to 62%. Of course this – that really depends on revenue mix as I’ve talked about in the past as well just overall level of revenues. As overall revenue levels move higher we could see that ratio coming down over time. But in the current environment we’re targeting the 61% to 62%.

Joel Jeffrey – KBW: A question on the fixed income trading side of the business. If muni prices kind of stabilize here or don’t move one way or the other meaningfully for the remainder of the quarter, just from trading volume alone, do you guys think you can get back to that sort of $25 million per quarter in revenue you talked about in the past as a run rate?

Andrew S. Duff – Chairman and CEO: Yes we do. There might be a slight change in mix between flow and trading, but we do anticipate that we will do that.

Joel Jeffrey – KBW: Can you give us a sense on typically how much of your business is flow driven and how much is driven by sort of marks on the portfolio?

Debbra L. Schoneman – CFO: So, Joel, I would talk about that in two – maybe in customer flow versus strategic trading, because they are marks on the portfolio that can happen in both of those businesses. So if you think about our customer flow business, which has been and will continue to be the majority of the revenues, we do hold also the majority of our inventory in that side of that business. We did experience trading losses, again, as we talked, for both realized and unrealized on that side of the business, again, given everything we’ve talked about with the increase rates and increase in spreads. Then on the strategic trading side, we did also experience challenging trading conditions, but on that side our net revenues were positive, just significantly lower than they had been in prior quarters…

Joel Jeffrey – KBW: Thinking about the advisory business, are we sort of through this hangover we’ve had in middle market M&As that came from the pull forward in the fourth quarter?

Andrew S. Duff – Chairman and CEO: We feel like we are, if I can just speak to our backlog and the activity we’ve got going on, exactly. It was sort of a Q1/Q2 event with a very substantial Q4 and we expect starting in Q3 to have a strong rebound.

Joel Jeffrey – KBW: Are there any areas in specific that you’re seeing the most strength?

Andrew S. Duff – Chairman and CEO: You know what, it’s really across our four industries, and very excited again to have addition of the (indiscernible) too now.

Joel Jeffrey – KBW: Then, I guess, just lastly for me, can you give us a sense – how much cash do you currently have on the balance sheet?

Debbra L. Schoneman – CFO: It’s just so you understand how we manage the business from a cash perspective, is we’re a net borrower every day to finance our inventories. So, the cash we hold is typically for reserves required for customer deposits or other capital requirements in various legal entities. So, I may have where we are at the end of quarter here, if you just give me one moment. We were at the end of June about $69 million and that excludes $27 million which was held aside and segregated for regulatory purposes.

A Closer Look: Piper Jaffary Earnings Cheat Sheet>>

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