Merriman Curhan Ford Group, Inc. Q3 2008 (Qtr End 9/30/2008) Earnings Call Transcript

Merriman Curhan Ford Group, Inc. (MERR)

Q3 2008 Earnings Call

November 10, 2008 5:00 pm ET

Executives

D. Jonathan Merriman – Chief Executive Officer

Peter V. Coleman – Chief Financial Officer

Analysts

Bruce Galloway - Galloway Capital Management

Tom Hack – LaBranche

[Victor Ruskin] – UBS

Presentation

Operator

Good day. My name is Mary and I’ll be the operator for today’s presentation, which is being recorded and will be accessible following this call until midnight on December 10 at 1-800-405-2236, code 11121072 followed by the pound sign. It will also be archived on the Merriman website at www.mcfco.com. Please go to the Investor Relations portion of the website.

Thank you for your interest in Merriman Curhan Ford. With me today is Chief Executive Officer Jon Merriman and Chief Financial Officer Peter Coleman. Mr. Merriman and Mr. Coleman are going to discuss the company’s financial results for the third quarter ended September 30, 2008. At the conclusion of the prepared remarks, we will open the conference for your questions.

Today the company has filed their 10-Q with the Securities and Exchange Commission, as well as an earnings release via Business Wire. Both of these documents are available on Merriman’s website at www.mcfco.com. In compliance with SEC requirements, I must read the following statement.

Except for historical information, the matters discussed on this conference call are forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. The factors that could cause results to differ materially are included in the company’s filings with the Securities and Exchange Commission. Forward-looking statements made during today’s call are only made as of the date of this conference call and the company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

Mr. Coleman, please proceed.

Peter V. Coleman

Thank you Mary. Thank you everybody for calling in today. I’m going to give a brief overview of the financials and then I’m going to turn it over to Jon for some commentary and then we’ll take any questions at the end.

For the third quarter 2008, total revenues came in at about $6 million. That’s a decline of 62% from what we saw in the second quarter. I’m just going to highlight a couple of the areas of major impact there. For the biggest contributor to the decline this quarter was in our principal transaction area where we lost about $5.4 million. Of that, our prop trading was down about

$2.4 million and then the investment portfolio was also down about $3 million. However, the majority of the losses there were unrealized gains in the quarter as opposed to gains.

Investment banking also declined 63% versus the second quarter. This was due to fewer deals than we saw in the second quarter. We were able to close one deal in the third quarter just over

$1 million. However, the pipeline does remain solid as many have seen in the investment banking business but actually getting those deals across the line has been challenging.

One bright spot on the revenue side was our commission business. The commission business actually closed up 1% in the quarter and it’s continued to show strength in the fourth quarter. On the expense side, total operating expenses declined 22% to $17.7 million and that’s down from

22.8% in the second quarter. Total comp was down 28%. This is largely due to salary reductions, eliminations of some draws, lower bonus accrual and some reduction in headcount as well.

As we noted on our last call, and is included in the financials this quarter, we had a headcount reduction that we undertook in the August timeframe. We have also further reduced heads in the

October timeframe. We think the total combination of these reductions plus other expense measures that we’ve taken on the course of the quarter should come to approximately

$10 million of annual savings. Most of those savings will be achieved before year end.

T&E was also down about 33%. This is in line with the lower banking activity as well as some strong measures we’ve taken to control those costs as well. Professional services were up 68%. This category has been largely affected with our legal spend. We think that our legal spend has likely peaked in the third quarter and anticipate some declines going forward from these levels.

Operating income for the quarter, losses increased 68% to $11.7 million, obviously driven by the lower revenues and expenses not being able to track as fast as revenues. However as I mentioned, I think we’ve put into a number of cost saving measures that we think will bring down those expenses in the subsequent months. On a cash operating basis, what we look at is EBITDA actually before principal transactions. This number was a loss of $5.9 million to give you a little bit better idea of a cash operating basis when you exclude the principal transactions.

On the balance sheet side just a couple of quick comments. Cash still remains relatively strong at

$7.9 million, down from $10.4 in the second quarter. On the marketable securities side, we saw a decline down to $5.3 million from $11.4. This decline again was largely attributed to revaluation in several of our portfolios and much of that were unrealized gains to this point. The company still remains strong, with no debt on the balance sheet and we think has the cash reserves necessary, combined with some of our cost cutting measures.

We think we’re in a good position to continue in this market environment. With that I’m going to turn it over to Jon and then we’ll take any additional financial questions at the end. Thanks.

D. Jonathan Merriman

Thanks Peter. Obviously it an all time horrendous quarter. We certainly can point to the overall financing environment and macro environment which are the worst I’ve ever seen and the worst possibly in this century, but there are things that we can do much better. But I’m going to touch on some things briefly and we’ll turn to questions.

First of all, my least favorite topic the legal matters. We have disclosed all possible issues and permutations in great detail in today’s 10-Q as well as the past 8-K so I can’t add a whole lot to that. I am cautiously optimistic we’ll have some visibility in clearing this mess up in the relatively near future, but there are no guarantees as all of you know with regard to legal. We can say, however, as Peter eluded to that our legal spend dropped pretty sharply starting in October which is obviously crucial given that this high degree of expense has been extremely damaging to the company.

In terms of our operations the third quarter as you know continued a very difficult [time] in the first half of 2008. The tone was particularly brutal to micro caps, smaller caps stocks as the hedge fund redemptions accelerated, the flight from risk really punished the less than liquid securities. And this phenomenon was a double whammy for us as banking in our sectors pretty much locked up and our warrant portfolio and our positions in our profit book deteriorated sharply.

We think we’re starting to see some relief in that area. It’s difficult to predict. Obviously the authorities have done incredible intervention measures. It’s going to take a while for that to drift down to micro caps, small cap land, but as I’ll discuss later on some of the valuations are absurd to say the least in that area.

In terms of the commission business as Peter said that business has held up pretty well. I think that’s primarily due to the extremely high volatilities in the market, increasing some trading volumes. However the number of hedge funds having difficulties or going out of business makes this particular business difficult on an ongoing basis. We continue to look at ways to differentiate our research product and get paid on a more recurring revenue from this area.

Small and micro cap companies, more so now than ever, need exposure to a diminishing pool of investors and we believe we can help and we believe we can get paid for helping them. Our successful OTCQX program is a great example of this. That measure, that business continues a pace we plan to continue to expand this approach into some other areas and we’ll be talking more about that later.

The banking pipeline does continue robust but as we discussed last quarter there’s been a real push out of timing. The deals don’t seem to die. They just stop. We continue to screen the mandates very tightly, but we have an increasing group of companies that are aggressively seeking near term capital. As we’ve discussed, however, the buyers are extremely risk averse making the closing process of these deals very extended.

As the capital markets gradually react to the extraordinary intervention measures we see and I believe the funding window will start to open again. We’re seeing some very early signs of that, despite how terrible October was. The defamation of the markets in October I believe the Russell was down around 24%, which is pretty extraordinary, we think marks a near term bottom. And we’re pleased to see that despite the difficulty of October our principal positions, after getting crushed in the third quarter, actually held up okay. They appear to be fairly washed out along with a lot of other securities.

In general, I believe that those players that can begin to look for value in the current market will be very rewarded over the next several years or so. The current period feels to me like 2001, 2002. The sentiment’s appalling. People are exiting the business left and right. And there are a record number of companies trading below cash. What is very different than the ’01 period, though, are the huge volatilities we’ve seen recently. October as some of you know was the most volatile month in the history of the S&P 500.

Nine days in October the index closed up or down 4%. That again makes things very difficult when the financing side is buyers just back off from the table when they see that type of volatility. Any type of flattening out or slowing up of a volatility will help the financing side.

The good news is that this type of volatility often marks at least an interim low for the markets. So we clearly haven’t come out of the other side yet. Business continues to be very, very difficult with some glimmers of improvement. We continue to move and break the lever rocks every day and are optimistic there. And as I said, the legal fees have dropped sharply which is crucial. Despite the brutal environment, the firm and its employees are staying in the trenches and clearly focused on closing business.

We know it’s tough for everyone. We’re certainly not paid for whining. We’re paid for doing business. We recognize the measures that we need to take to survive in this environment and we’re taking them. They’re difficult measures. We know what we have to do. And we’re not sitting here blaming the environment and moaning. We’re in motion. So we appreciate everyone’s involvement. The game plan for us is to live to fight another day because we believe that those firms that stay, stay in the game as get after it, will benefit greatly from the current turmoil.

That’s our mission. Thanks for joining us today and I open for questions.

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions) Your first question comes from Bruce Galloway - Galloway Capital Management.

Bruce Galloway - Galloway Capital Management

Jon, could you give us a little overview on what the best case and the worst case could be on the legal situation? I know you don’t like to talk about it. And also in your warrant and principal positions, you know, if things were to deteriorate further how much downside do you have in that left over?

D. Jonathan Merriman

Thanks Bruce. I have to tread cautiously on the legal question, but I’ll just create a hypothesis. I mean, obviously what we want to do at some point is settle on the civil side. Those cases, if they were to go to trial, would be sort of many, you know, years out potentially. So we’d like to get that resolved as quickly as possible.

The good news is that the legal spend drops off. Obviously that’s apt to, you know, multiple millions of dollars of cash from our balance sheet so we simply can’t continue to shell out, you know, massive legal fees every month. So the near term mission is to settle up and allow us to focus purely on business.

With regard to the warrant portfolios and the prop account stuff, I think some of this stuff’s pretty washed as we saw in October. Obviously if, you know, if the market were to go down another 10, 20% in next month, which I guess it could, I think these securities would be affected. You know, one of the companies we have a large investment in is a gold company, so it tends to be traded a little bit counter to the rest of the overall market. But, you know, anything that’s small in micro tends to get affected in an environment like this.

That being said, we’re very optimistic about them. But they’re relatively liquid. We think we could exit what we needed to if we had a problem.

Peter V. Coleman

I’d just add on to that, we also have continued to take prudent measures in all of the portfolios and liquidate where possible when we think we can realize some gains or manage the exposure level. So we will continue to manage all of those accounts, recognizing our cash and liquidity needs.

Bruce Galloway - Galloway Capital Management

And what do you think the legal fees will be over the next couple of quarters? I see you spent like almost $4 million bucks in professional fees in the last quarter.

D. Jonathan Merriman

I don’t want to quantify that, but I can tell you a hell of a lot lower. How’s that for quantification?

Bruce Galloway - Galloway Capital Management

Okay. Because if you net out the legal fees, then the prop and the warrant write downs or markdowns, you know, it’s not so bad. You only lost about $2 million in operating.

D. Jonathan Merriman

You are truly an optimist, but I would agree with that.

Bruce Galloway - Galloway Capital Management

And with the cost cuts you should be able to, you know, operate breakeven, ex the legal and the prop stuff.

D. Jonathan Merriman

The cost cuts are very significant and we’re looking at a plan that projects sort of sharply lower revenues, you know, from our banking business. And we still think that we can be profitable under that plan. As we alluded to in the press release, we continue to increase the recurring revenue parts of our business. Obviously if the revenues from other areas decrease, the recurring revenues go up considerably, but those are starting to be – they continue to grow and they are starting to be a real part of our business.

So yes you get rid of some of the movement and the warrants and some of the prop positions, as you said, and drop off the legals, things look a lot better. So it’s a tough time, when you combine a difficult market with massive legal expense and that’s what we’re fighting.

Operator

Your next question comes from Tom Hack – LaBranche.

Tom Hack – LaBranche

Have you purchased any of your own shares on the open market? And is there a plan for a reverse stock split?

D. Jonathan Merriman

As to A, we have not purchased any. We have a couple of things. We have a share repurchase that we put in place at the end of last year. We haven’t executed any of that. And we haven’t – none of the insiders on the board of the management team have bought the stock because on the advice of our attorneys we are not allowed to buy the stock while the legal business is ongoing.

As you probably know, I’ve been a continuous buyer of the stock almost every quarter but have not bought the stock since the legal stuff started in May.

And I’m sorry, the second question was what? Oh, the stock split. No, we have not contemplated a stock split.

Tom Hack – LaBranche

And it appears that management has given back stock options recently.

D. Jonathan Merriman

Yes that’s right. We gave back the management committee gave back stock options and also extended the ability for anyone in the firm to give back their stock options. The mission for the management committee to give back those options was to increase the – or create a much larger pool of options to equitize the employees during a tough time.

Operator

Your next question comes from [Victor Ruskin] – UBS.

Victor Ruskin – UBS

I didn’t hear the beginning of the call, so I don’t know if you already covered this, but could you talk a little bit about the [bed] panel and how that’s going and marketing approaches?

D. Jonathan Merriman

Yes. MedPanels is kind of chunking along, you know, decent growth. What we found in that area is twofold. One, that the corporate business of MedPanel which is the original and the largest part of that business continues to be very strong. This is sort of the larger biotech companies doing surveys and what have you. The financial side of the business, i.e., selling the Panels surveys to hedge funds by side institutions has not grown and I think the reasons there are fairly obvious, that the customer base has grown much smaller.

And their willingness to spend money on MedPanel has diminished. So the growth there has been okay. You know, we’re kind of looking at 20% growth over a one year basis. Again, the financial side of it’s been, I’d say, disappointing and the corporate side of it’s been very good.

Victor Ruskin – UBS

Any thoughts of expanding to a couple different areas?

D. Jonathan Merriman

Yes, we’re in the early stages of expanding that business into the Clean Tech or, you know, Next Generation Energy or however you want to call that. There’s a lot of obviously questions that come around technologies that relate to the environment. And you know we have a brand in that area so we think that there’s things that can be done in Clean Tech off of the panel platform.

Victor Ruskin – UBS

Just to give you clarification on the numbers, panel was $1.4 million for the quarter; that’s up about 24% on a year-over-year basis.

Operator

Thank you. And management I’m showing that there are no further questions. I’ll turn it back to you for closing comments.

D. Jonathan Merriman

That’s it. Thank you everybody for dialing in and asking questions. Again at any time feel free to call me directly or email me. I try to respond at all times to shareholders if you’ve got further questions. Obviously that’s particularly important after a difficult quarter like this. So definitely feel free to exercise that and thank you very much.

Operator

Thank you. Ladies and gentlemen that will conclude today’s teleconference. We do thank you again for your participation and at this time you may disconnect. Have a nice day.

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