PJC
#Good morning, and thanks to everyone joining the call.
This is the first for Tim <UNK>, our new CFO, and me to host our earnings call.
So we are very excited to be on the call today.
We are especially excited to report our fourth consecutive year of record revenues.
Deb <UNK>, who is an old pro at doing earnings calls, is with us today as well.
So Deb and I will take a few minutes to discuss the business and markets and then hand the call over to Tim to go through the financials in more detail.
We will then open up the call for questions.
The record revenue levels we have produced is a testament to the skills and dedication of all of our partners across the firm, both on the front line and support.
I want to thank them for their long-term commitment.
The significant number of professionals we've added to the firm over the past few years made meaningful contributions to our record results.
Maybe even more important, however, is that very few professionals have left the firm.
The culture we have at Piper Jaffray is unique and, we believe, a competitive advantage.
Our constant focus is on making Piper Jaffray the best possible home for our employees to serve their clients' interests.
And the continuity of our professionals reflects that we are getting this right.
The main driver for revenue growth has been our advisory business.
This has been an area of strategic focus and investment for the firm over the past several years.
We like the attributes of this business as it doesn't use capital and it has a variable cost structure.
We believe that remixing our business toward more advisory revenue would improve our overall profitability and return on capital.
This has played out as we intended.
The growth trajectory of our advisory business has been dramatic and broad based.
With over $440 million in revenue for 2017, the business has grown fivefold since 2013.
We accomplished this with some pretty big jumps in revenue.
In 2014, we more than doubled the business to over $200 million of revenue.
We exceeded $300 million last year.
And this year, we approached $450 million in revenue.
These results required a comprehensive effort and investment through both the P&L, as we hired teams, and the balance sheet through acquisitions.
In terms of industry exposure, we added energy with the Simmons acquisition and FIG through aggressive hiring and a small acquisition.
We also added subverticals like healthy living in consumer and strengthened certain franchises like our biotech and healthcare IT practices.
Our healthcare, energy and consumer teams each had record years in advisory in 2017.
These groups provided solid and diversified foundation for our business.
We supplemented our advisory expansion with new products, particularly the addition of the debt capital markets team in 2015.
This team, with its debt advisory capabilities, executed on transactions across our banking platform, contributing revenue and enhancing our competitive position.
This product really added to the range of advice we can provide our clients, and we look to expand our capabilities in this area.
When we look at where we are today in advisory, there is no doubt we have grown by capturing significant market share gains over the past few years, supplemented by very constructive markets.
Given the slope of our growth trajectory, the pace of growth could slow somewhat.
Advisory is inherently lumpy and can vary significantly on a quarterly basis.
We expect that we will continue to invest in the business as we look to add or strengthen subverticals across all of our industry groups.
I'm confident we can take a platform that today is a solid $400 million a year per business and build it to north of $500 million and beyond in a reasonably good market over the next few years.
Our equity capital raising business had a very strong year, generating revenue of $100 million in a much better market environment.
The market for equity capital raising dropped in the first half of 2016 and has improved significantly since then.
Our biotech team led the way for us in 2017, as that factor again was the most active segment in the market for capital raising.
Our Simmons Energy team also contributed to the strong results.
Prior to our acquisition in 2016, Simmons had book-run only 1 transaction in its history.
We completed 8 book-run transactions in 2017.
This represents an important revenue synergy arising from our combination.
I will now hand the call over to Deb to discuss the rest of our businesses.
Thanks, <UNK>.
Public finance recorded strong results in 2017 on the heels of a record year for both us and the new issue market in 2016.
We experienced a wave of issuance in Q4 spurred by pending changes arising from the Federal Tax Bill that passed in December.
Under the new tax law, tax exempt advance refundings will be eliminated, which drove a surge of refunding activity late in the year.
We participated in this activity as Q4 was the best quarter of the year for public finance.
However, we expect a new issuance market will be down meaningfully in 2018 as some of the demand was pulled forward into 2017.
Refundings overall represent about half of the market issuance over the past several years, and we expect this segment of the market will be lower in 2018.
We think 2018 will get off to a slow start after the surge of activity at the end of 2017, and we are confident that we will maintain our prominent position in this market.
Moving on to our brokerage businesses.
Equities had a good year relative to a very tough market condition.
For the year, our business was down about 7% compared to a decline of 11% in market volume.
Historically low levels of volatility, once again, led to subdued activities.
We believe continued market share gains are available to us as we find ways to create and communicate the value we bring to our clients.
For much of the year, the potential impact of [method two] on the industry has been a major topic of discussion.
Since this is European Regulation, our expectation is that the impact on the U.S. market might be more gradual and less severe.
While we will closely monitor this situation, our main area of focus continues to be providing our clients with the highest possible quality of service.
Fixed income finished 2017 on a high note, reporting the best quarter of the year.
The huge influx of new issues that swamps the market late in the quarter was challenging for the market to absorb.
This created some price dislocations for munis.
Given our deep knowledge of the muni market, we were able to adapt the trading posture to take advantage of the dislocation.
This contributed to our strong results for the quarter.
Customer activity remained light for most of the year, given very low interest rates and the flat yield curve.
Our Asset Management business continued to face persistent market headwinds throughout the year.
The predominant market trend was a shift from active managers to passive strategies, and we were not immune from this trend.
Our year-end assets under management were down about 16%.
A large portion of the decline was the result of our decision to exit the Japan value product mid-year.
Outflows in domestic value and international small-cap products also contributed to the decline in assets partially offset by inflows associated with our new global dividend product.
Business continued to contribute to the overall profits of the firm.
I will now turn the call over to Tim to discuss our financial performance in greater detail.
Thanks, Deb.
As context, unless specifically noted, my remarks will be focused on our adjusted non-GAAP results.
We finished the year very strong with revenue for the quarter just slightly behind last quarter's record levels.
For the year, we generated record revenues of $870 million.
<UNK> discussed some of the progress we've made in the shift to advisory, which shows up in the numbers.
For 2017, advisory was 51% of total revenues versus 41% in 2016.
With over half of our revenue coming from advisory, we are seeing the positive impacts on our overall business model we expected.
Revenue growth coming from advisory contributed to increased operating leverage, as our operating income was up 38% on a revenue increase of 18%.
This resulted in a 260 basis point improvement in operating margin, which really was attributed to a lower noncomp ratio.
Since advisory places much lower demands on the fixed infrastructure, noncomps were up only 2% for the year on 18% revenue growth.
These results translated into much better return for our shareholders in 2017.
We produced a record adjusted EPS of $7.12 for the year, an increase of 52% over 2016.
Our adjusted return on equity for the year was a little over 14% versus about 9% in 2016.
As mentioned on last quarter's call, in addition to the very strong operating earnings, there were a couple of other items favorably impacting our adjusted ROE for the year.
First was the positive earnings impact attributable to the tax benefit associated with the vesting of employee stock awards.
It's worth mentioning that the impact of employee stock award vesting from taxes will vary from year-to-year.
The second favorable impact on ROE was the reduction of our equity related to 2 noncash asset write-offs this year.
In Q3, we reported a reduction in good will, and in Q4, a reduction to our deferred tax assets, which I will address shortly.
ROE will continue to be impacted by these noncash write-offs, as they have permanently reduced our equity base.
If we exclude these items, our adjusted ROE still exceeds our cost of capital and represents a significant improvement over the prior year.
Now I would like to discuss some of the other items in the earnings release.
As you may note, the comp ratio for the quarter and year looks elevated and above our prior guidance.
A remix in the compensation structure for our senior executives was the driver for the higher comp ratio.
Based on feedback from our investors, we change the mix of total comp for our senior executives to increase the portion of performance-based grants or PSUs and reduce time-based awards.
Given the magnitude of remixing comp to PSUs, we revised the retirement provisions for all of our leadership team members to look more like our restricted stock awards.
The net effect of this change is that the PSU grants, which will be awarded in early 2018 as a part of 2017 comp, were expensed in 2017.
Given the timing of board approval, the entire impact of this change was captured in Q4.
This increased the comp ratio in the quarter by about 200 basis points and the full year by about 50 basis points.
Going forward, we believe our comp ratio will be in a relatively tight range around 64% depending on total revenue, revenue mix and investment opportunities available to us.
Our noncomp expenses of about $41 million for the quarter exceeded the high end of the $38 million to $40 million per quarter range we communicated previously.
The variance is attributable to increased travel and conferences and additional legal and professional fees.
For the year, noncomp expenses averaged a little over $38 million per quarter, well within our target range.
Despite the growth in the business, we are comfortable reaffirming our noncomp target range of $38 million to $40 million per quarter going forward.
Next, I would like to address a couple of tax related items.
First, we previewed in our Form 10-Q filing for the third quarter that the new Federal Tax law was expected to result in a $50 million to $55 million write-off of our deferred tax assets.
Our DTA write-off came in at the high end of the range at around $54 million.
From a P&L perspective, this shows up as additional tax expense in our GAAP results.
Our adjusted results exclude the impact of this write-off.
Looking at our tax rate going forward, we believe it will be in the 25% to 27% range.
The federal tax rate was reduced by 14 percentage points to 21%.
Offsetting this, the new law removed some expense deductions.
We expect the net impact of the lower rate and fewer deductions plus state taxes puts us in the 25% to 27% range.
I will finish up here with the dividend.
As we disclosed in our Form 8-K filed in November, management recommended a change to our dividend policy, which the board approved.
We made this change largely due to the increased portion of our business coming from advisory.
The favorable impact of advisory on our business model gives us greater earnings and flexibility to return more capital to shareholders through the dividend.
Under the new policy, the dividend for the year will be based on a payout ratio of the year's adjusted earnings.
Since we already pay a quarterly dividend, each year, we will have a make-whole payment, which will be calculated based on the payout ratio approved by the board less dividends already paid for the year.
For 2017, the board determined that we would pay out 40% of adjusted earnings.
Based on our reported adjusted EPS of $7.12, the total dividend for 2017 would about $2.87 per share.
We have already paid $1.25 per share in quarterly dividends, so our make-whole dividend for the year will be $1.62 per share.
This special dividend will be paid in conjunction with our regular quarterly dividend on March 15 to shareholders of record as of the close of business on February 26.
I would like to remind everyone that the board also approved a 20% increase to our regular quarterly dividend from the 2017 level of $0.3125 per share to $0.375 per share beginning in the first quarter of 2018.
Thanks, Tim.
Operator, we'd like to open up the line for questions.
Yes.
I'll address that.
I think, for us, obviously, we've seen such big growth the last couple of years in advisory, and we're continually adding to the platform.
What I would say is it's not evident that, that growth is going to show up every quarter in a linear fashion.
And I do think ---+ we do believe there's significant continued growth, whether that shows up every quarter or all in a particular year.
We're focused on building the platform, and over time, we really believe that's going to show up in the advisory growth.
Yes, <UNK>.
Clearly, there was a large-pull forward from '18 into '17 and there's a lot of perspective ranging anywhere from $20 billion to $40 billion out in the market.
And I guess, I feel like it's probably more in the lower end of that range than the higher.
But at the end of the day, that was pulled forward.
There was ---+ there has been a decline in refundings just as interest rates have stayed low for a long period of time.
And really, I think in terms of your question around the more long-term impact from the tax bill, you look at the elimination of tax exempt advanced refundings, and overtime, that will moderate and sort of even out as ultimately, the deals that are in the marketplace have an ability to be called.
So it's really just a time period where the advanced refundings won't be able to be done.
If you think about what that means for 2018, and you talked about the ---+ how that plays out over the year, I think there's just a lot of questions and it's quite unknown.
Clearly, the first quarter is going to be impacted by the pull-forward.
I think, that is pretty evident.
And overall, issuance is likely to be off meaningfully on a year-over-year basis.
But how that plays out throughout the year, I think, it's really an unknown.
Yes.
<UNK>, it is prior to the benefit that we will see in 2018 related to stock-based awards.
We'll see most of that likely in Q1 based on the timing of when we issue those awards.
It is dependent on the stock price, and we will actually disclose a specific number around that in our 10-K filing, but are not providing any additional guidance on that piece at this point.
Sorry if I missed this, I joined the call a little bit late.
But I was hoping you could just give us some color on what sectors were the largest contributors to advisory this quarter.
And how that relates to what drove strength earlier this year.
Yes, it's interesting.
Throughout the year, we've had different pockets of strength with healthcare and consumer, and in particular, in Q4, we had a very strong energy quarter.
Okay.
Perfect.
And just a follow-up on your commentary regarding the debt advisory business.
So just from a higher-level perspective, can you give us a sense for what you see as the market opportunity there.
And what type of scale we might see that business become within your platform over the next couple of years.
Yes.
So for us, there's been a pretty good focus on ---+ as we've really built an advisory business, and we have a significant platform of investment bankers.
We saw a great opportunity to provide advisory around the debt placements.
And that business has grown, and we've had a couple of great years, and we frankly think that can continue.
The more large M&A deals we work on that need to be financed, the more opportunity there is for us.
There is a whole bunch of alternative lenders and sources for capital that are unique, and we can really offer those relationships to our clients.
So we expect pretty good things going forward with our debt capital markets product, and look for that to continue to be a growth engine.
Okay, thank you.
Clearly, the strategy we have in place is working and our execution is solid.
We are actively seeking investment opportunities that are in line with our strategy, as we look to expand our industry footprint and broaden our product offerings.
We would also be open to consolidating opportunities, where we can add revenue to the platform while eliminating costs.
Our emergence as a market leader across many of our businesses is evidence of the strength of the entire team here.
We look forward to continuing to produce great results for our shareholders.
Finally, before we close the call today, on behalf of our entire organization, we'd like to express our gratitude to Andrew Duff, who retired as CEO at the end of 2017.
He guided us with a steady hand over the past 17 years and certainly leaves some big shoes for us to fill.
We look forward to working with Andrew in his role as Chairman of the Board in 2018.
Thanks to everyone, and have a great day.
