Business context and reporting period
Piper Jaffray Companies (the company’s name at the time of this filing) filed this unaudited Form 10-Q for the quarter ended March 31, 2019. It provides investment banking, institutional brokerage and asset management services through its Capital Markets and Asset Management segments. Unless otherwise stated, amounts below are in U.S. dollars.
Financial results and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $194.5 million | $174.4 million | +11.5% |
| Net revenue | $191.8 million | $169.1 million | +13.5% |
| Income before tax | $22.9 million | $8.0 million | +185.3% |
| Net income applicable to Piper Jaffray Companies | $19.4 million | $10.6 million | +83.2% |
| Net income applicable to common shareholders | $17.8 million | $6.4 million | — |
| Diluted EPS | $1.32 | $0.47 | +180.9% |
| Adjusted diluted EPS (non-GAAP) | $1.57 | $1.38 | +13.8% |
Non-GAAP adjusted results exclude specified items, including acquisition-related compensation and acquired-intangible amortization; they should be considered alongside, not instead of, GAAP results. The 2019 GAAP tax provision was $4.1 million, including a $1.7 million benefit related to stock-based compensation vesting. The corresponding 2018 period included a $5.0 million stock-award tax benefit.
Net revenue grew as investment banking revenue increased 16.7% to $141.1 million and institutional brokerage revenue rose 26.4% to $35.0 million. Asset management revenue declined 17.2% to $10.4 million; interest revenue fell 27.3% to $7.6 million and investment income fell to $0.5 million from $2.9 million. Compensation and benefits rose 6.5% to $122.6 million, while total non-interest expenses increased 4.9% to $168.9 million. Compensation was 63.9% of net revenue, down from 68.1%; GAAP pre-tax margin was 12.0%, up from 4.8%.
Operating cash flow was $28.5 million, versus $146.4 million a year earlier, reflecting working-capital movements, including lower accrued compensation. Investing activities used $1.4 million and financing activities used $59.7 million, including $19.9 million of dividends and $39.7 million of employee-related share purchases. Cash fell $32.1 million during the quarter to $18.2 million.
At March 31, 2019, total assets were $1.170 billion, total liabilities $456.0 million and total shareholders’ equity $713.7 million. Short-term financing was $50.0 million, consisting of secured commercial paper; the company reported no advances on its $175 million committed or $85 million uncommitted bank lines. It also reported $169.5 million of financing outstanding through Pershing and $101.8 million through a prime-broker arrangement. The $125 million senior notes had been repaid at maturity in October 2018. Regulatory net capital was $214.6 million, $213.6 million above the SEC minimum. The reported leverage ratio was 1.6, compared with 1.8 at year-end 2018.
Material changes versus the prior comparable period
- Capital Markets drove the improvement: segment pre-tax income rose to $23.9 million from $9.0 million, and margin increased to 13.1% from 5.7%. Asset Management recorded a $1.0 million pre-tax loss, broadly similar to the prior-year loss of $1.0 million.
- Advisory revenue rose 52.5% to $114.9 million, helped by two larger transactions; completed deal count was similar year over year. Equity financing revenue fell 64.1% to $13.5 million, including fewer bookrun deals, while debt financing revenue rose 70.2% to $13.1 million.
- Fixed-income institutional brokerage revenue increased 44.9% to $23.7 million; equity institutional brokerage revenue declined 12.7% to $15.7 million.
- Assets under management were $6.311 billion, down from $6.877 billion a year earlier. First-quarter market appreciation lifted AUM from $5.755 billion at the start of the quarter, but net outflows totaled $282 million.
- Cash at quarter-end was $18.2 million, compared with $27.6 million at March 31, 2018. First-quarter 2019 operating cash flow was also substantially lower than the prior-year quarter.
Outlook, risks and notable items
Management expected moderate U.S. economic growth for the rest of 2019, while warning of trade-policy uncertainty, global economic deceleration and possible market volatility. It described the advisory pipeline as strong and expected activity to be weighted toward the second half of the year. Equity-capital-raising conditions had improved entering Q2, but sustained volatility or a material market correction could hurt advisory and financing activity. Management expected low rates and a flat yield curve to weigh on fixed-income customer flow, while municipal issuance was expected to improve. Asset management remained exposed to investment performance, valuations and continued pressure on AUM.
The company agreed to acquire Weeden & Co. on February 25, 2019; the transaction was expected to close early in Q3, subject to regulatory approvals and customary conditions. The company expected to pay approximately $24.5 million in cash at closing. A $39.1 million Simmons performance-award accrual was expected to be paid in August 2019. The filing also estimated a roughly $3.6 million tax benefit in Q2 related to performance share units and inducement-plan shares vesting above grant price.
Lease accounting adoption on January 1, 2019 added a right-of-use asset and lease liability; at March 31, the asset was $41.9 million and the accrued lease liability was $56.2 million. The company disclosed $65.0 million of undiscounted operating-lease commitments. Legal matters included securities-related claims and regulatory proceedings; management said reasonably possible losses beyond accrued amounts were not material, while noting that outcomes and estimates remain uncertain.
Risks highlighted include market and liquidity exposure, reliance on short-term and collateralized funding, counterparty credit risk, legal and regulatory matters, operational and cybersecurity risks, and dependence on attracting and retaining employees. Uncollateralized derivative credit exposure was $16.9 million, including $13.9 million with one counterparty. Trading losses exceeded the company’s one-day VaR measure on three occasions during Q1; quarter-end VaR was $290,000. The company also had $78.0 million of investment commitments with no specified call dates.
Important facts for investors to verify
- Whether Q2 and second-half advisory and equity-financing activity converted the reported pipeline into completed transactions and revenue.
- Whether Weeden & Co. closed on the expected timetable, and its final purchase consideration, integration costs and contribution.
- Payment and final amount of the $39.1 million Simmons award accrual, and the expected Q2 tax benefit from vesting awards.
- Cash generation and liquidity after dividends, employee share purchases and acquisition-related payments; availability of collateral and discretionary funding from Pershing and other counterparties.
- AUM flows and performance, especially whether ongoing outflows and prior market depreciation continued to pressure management fees.
- Developments in concentrated uncollateralized derivative exposure, legal and regulatory matters, and the company’s ability to remain above regulatory and financing-covenant capital thresholds.