Broadpoint Securities Group Q4 2008 Earnings Call Transcript

Broadpoint Securities Group, Inc. (BPSG)

Q4 2008 Earnings Call

February 24, 2009 10:00 AM ET

Executives

Lee Fensterstock - Chairman and CEO

Robert Turner - Chief Financial Officer

Analysts

Devin Ryan - Sandler O'Neill

John Ehlinger - MAST Capital Management

Scott Appleby - Appleby Capital

Lauren Smith - KBW

Presentation

Operator

Ladies and gentlemen welcome to the Fourth Quarter 2008 Broadpoint Securities Group Earnings Conference Call. My name is Tanya and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions).

forward-looking statement: Certain statements made on this conference call constitute forward-looking statements. These statements are not historical facts, but instead represent the company's belief regarding future events, many of which by their nature are inherently uncertain and outside of the company's control.

The company's forward-looking statements are subject to various risks and uncertainties including the conditions of the securities markets generally and acceptance of the company's services within those markets and other risks and factors identified from time to time in the company's filings with the Securities and Exchange Commission.

It is possible that the company's actual results and financial condition may differ, possibly materially from the anticipated results and financial condition indicated in its forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements. The company does not undertake to update any of its forward-looking statements.

I would now like to turn the presentation over to your host for today's call, Mr. Lee Fensterstock, CEO of Broadpoint. Sir, please proceed.

Lee Fensterstock

Thank you. Good morning and welcome to Broadpoint's fourth quarter 2008 earnings call. With me is Peter McNierney, President and Chief Operating Officer and Rob Turner, our Chief Financial Officer.

I'd like to make some general comments and than Rob will review the numbers after which, Peter, Rob and I will be happy to take questions.

I'd like to comment on what we are trying to accomplish here at Broadpoint, while the microenvironment is creating an opportunity of a lifetime for us and what we have accomplished so far.

Simply put, we are creating the next-generation investment bank. One which will provide a broader range of value added un-conflicted advice and execution to corporations and investors.

We intend to deliver these services through professionals of the highest caliber who provide true economic value to the clients. As a result, we believe our shareholders will benefit and it is the firm's philosophy that our employees will benefit without limitation from the value they create.

For the past 25 years, the American economy and the corporations and entrepreneurs which have created the economic growth so critical to American life and our standard of living have benefited greatly from our system of investment banking. Whether raising capital for corporations or helping investors reach their goals, American investment banks have been indispensable intermediaries.

In the last six months, our invaluable investment banking system has been severely damaged and dramatically reduced in size. At the same time, the needs of corporations and institutions for advice and execution, has never been greater. Our goal would be to meet their needs and to help fill the competitive void left by recent developments in the industry.

In terms of our progress, during the last 18 months, we've raised 95 million in new capital, hired 243 sales trading, research and banking professionals, with the number one performer in terms of stock price of independent public investment banks, since our recapitalization. And we rank tenth in terms of market capitalization of independent investment banks.

This quarter saw a continued progress with Broadpoint recording its first operating profit and achieving revenue growth of 378% over the year ago quarter. We are particularly proud of our annualized revenue per employee of $842,000 which places us at the high-end of our peer group, in terms of productivity.

Now what I'd like to do is turn it over to Rob Turner, who can take everyone through the details of the financials for the quarter. Rob?

Robert Turner

Thank you, Lee. The fourth quarter of 2008 was a horrendous quarter for many of our competitors. The dislocations in the market place however worked to Broadpoint's advantage.

We were able to fill the vacuum in the fixed income and equities' markets resulting from our competitors leading or scaling back their trading operations. Broadpoint provided our customers with the valuable services they required and we achieved solid operating results for the fourth quarter.

Net revenues exceeded 50 million in the fourth quarter, a 378% increase from the fourth quarter 2007's revenues of 10.6 million. Broadpoint earned a net profit for the fourth quarter of 1.8 million compared to an 8.3 million net loss in the fourth quarter of 2007.

Let me review Broadpoint's revenues by business segment and our expenses for the fourth quarter of 2008 and the fourth quarter of 2007. Broadpoint Descap, our mortgage and asset back trading division generated 15.9 million in revenues in the fourth quarter, 185% increase compared to 5.6 million of revenues in the fourth quarter of 2007.

Our Debt Capital Markets division which commenced operating in March 2008 produced net revenues of 26.2 million in the fourth quarter.

Our Investing Banking division generated 2.4 million in revenues compared to the prior year fourth quarter revenues of 1.2 million.

On October 2, Broadpoint acquired American Technology Research, now known as Broadpoint AmTech, our equity division. Broadpoint AmTech generated 6.2 million in revenues in the fourth quarter compared to 2.3 million produced by our legacy equities business in the fourth quarter of 2007.

Our other segment includes a 700,000 loss, primarily as a result of write-downs in the carrying value of investments in our venture portfolio compared to an 885,000 gain on these investments in the prior year quarter.

Non-interest expenses for the fourth quarter were 48.7 million, 142% increase compared to 20.1 million in the prior year quarter. Compensation and benefits expense in the fourth quarter was 40.1 million, a 273% increase over the prior year amount of 10.8 million, driven by an increase in our revenues of 378%.

Clearing, settlement and brokerage expense of 918,000 in the fourth quarter nearly doubled from the prior year quarter, primarily due to the activities of the Debt Capital Markets division and the increased trading activity in Broadpoint Descap.

Communications and data processing expense of 2 million increased only slightly from the prior year quarter. Through the aggressive management of cost, we were able to significantly grow our head count with little impact on these costs.

Occupancy and depreciation expense of 1.4 million in the fourth quarter was lower by 15% from the prior year quarter, due to our exiting excess real estate as part of our restructuring efforts which began in the fourth quarter of 2007 and concluded in the third quarter of 2008.

Other expenses of 3.3 million, consistent primarily of legal, audit, insurance, recruiting and professional fees were higher in the fourth quarter compared to the prior year quarter, due to increases in legal expenses and recruiting fees.

Now le me review Broadpoint's revenues by business segment and our expenses for the year ended December 31, 2008 compared to 2007.

Our net revenues for 2008 were 134 million a 235% increase from 40 million revenue for 2007.

For 2008, Broadpoint's Descap generated 51 million in revenues, a 234% increase compared to 15.3 million revenues for 2007. The Debt Capital Markets division generated revenues of 59.3 million and contributed 44% of Broadpoint's revenues for overall 2008.

The Investment Banking division produced 12.9 million in revenues in 2008 compared to revenues of 6.2 million in 2007. The Equities division revenues for 2008 were 11 million compared to 13 million in 2007. Our legacy equities group's poor performance was the catalyst for acquiring American Technology Research in the fourth quarter of 2008.

In our other segment, investment losses in Broadpoint's venture portfolio were 1.1 million in 2008 compared to a gain of 2.6 million in 2007.

Non-interest expenses for 2008 were 149.1 million, a 108 percent increase compared to 71.7 million in non-interest expenses for 2007.

Compensation and benefits expense for 2008 was 111.7 million, a 170% increase over the prior year amount of 41.3 million, primarily due to an increase in revenues of 235%.

Clearing, settlement and brokerage expense of 2.8 million in the fourth quarter declined by 11%, primarily due to decrease in activities in our legacy equities division offset by activity in Debt Capital Markets and increased trading at Broadpoint Descap.

Communications and data processing expense of 9.2 million increased 80% from the prior year. Due to the aggressive management of costs, we were able to significantly grow our head count with relatively little impact on these expenses.

Other expenses for 2008 were 10.7 million compared to 6.1 million in 2007. The increase was primarily due to legal fees and recruiting fees.

Looking back over the last 15 months, we have accomplished much. The company raised 95 million in equity and long-term funding, acquired the Bank of New York Debt Capital Markets Group in March, acquired AmTech in October, restructured the company eliminating excess real estate redundant market data and telecom expenditures moved to clearing on a fully disclosed basis and dramatically reduced support personnel.

The fourth quarter's results show our comprehensive effort to grow our revenues and to reduce costs. At the same time of the capitalization of Broadpoint in the fall of 2007, head count totaled 167 professionals, consisting of 86 revenue producing personnel and 81 support. Today, Broadpoint employs 248 professionals with 183 client-facing employees and 65 in support roles.

Over the past year, management has been working diligently to transform the company and I believe the results show that we are succeeding.

I look forward to reporting our progress to you next quarter.

Lee Fensterstock

Okay, thanks Rob. At this point, we would be happy to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question will come from the line of Devin Ryan with Sandler O'Neill. Please proceed.

Devin Ryan - Sandler O'Neill

Good morning guys.

Lee Fensterstock

Hey Devin.

Devin Ryan - Sandler O'Neill

Congrats on the operating profit. I just have a few questions here, just one, just given that the change in competitive landscape that you spoke of, particularly at some of your large peers. In what businesses are you seeing the biggest benefits and opportunities and do you have any comments around maybe market share gains in any of these businesses, either quantitative or qualitative would help either?

Lee Fensterstock

Okay. So, in terms of where we see the opportunities, it's really been across the board. The place that we so far have benefited the most has been sales and trading. And it's really cut across all of the products and whether that's in the mortgage area or in the interest rate area or in the high grade area or in the high yield area. We've seen both, very talented individuals that are available, groups that are available. And as a result, we've able to dramatically grow our head count, as Rob mentioned. What belies the numbers in a way is that, while we have 248 people in total in the firm, we actually hired 243 people over the last 15 months. So we've essentially rebuilt the firm as a result of the competitive disarray, if you will.

As far as market share gains are concerned, we don't have a specific measure that we look at. We're really looking at the revenues frankly. And when you grow from 10 million in the quarter to 50 million, we are definitely taking out market share across the broad.

Devin Ryan - Sandler O'Neill

Okay. And just in terms of the rebuilding, how much is left and is there a timeframe that you would like to have to essentially complete or is it going to be more a function of just opportunity and as they are presented?

Lee Fensterstock

Well, if you mean rebuilding, adding people and businesses, we've just started. I mean this is the beginning. If you take the look at the broad market place, we estimate the whole market revenue-wise, both from an investment banking point of view and a secondary sales and trading point of view, we estimate that's $150 billion a year market.

And you've got competitors like Lehman or Bear that are out of business, Merrill, that's severely wounded. UBS, that's severely wounded. They represented in these businesses billions and billions of dollars of revenues. And it's our intension to go after that. So we don't see the rebuilding process frankly, having very many limits for quite a while. Our goal playing it simple is or our next goal is to build $1 company. And we think the opportunities are there for us.

Devin Ryan - Sandler O'Neill

Okay. That's helpful. And just from the balance sheet, kind of a technical question here, it looks like securities owned increased quiet a bit from last quarter and I know this can fluctuate quite a bit from quarter-to-quarter. But is that just more a function of the recent business additions and should this be increasing significantly decreasing, just any color on that, just given the decent increases this quarter?

Lee Fensterstock

Sure. Well the growth year-over-year is really all in the mortgage area. And it is virtually totally an increase in agency securities which are now government guaranteed. And it is mirrored with the growth in the distribution platform in that business. So, we see that continuing to grow to the extent that we lower our client base and we grow our steps, it's kind of a proportional growth.

Devin Ryan - Sandler O'Neill

Right, Okay, great. Thanks a lot for taking my questions.

Lee Fensterstock

Okay, Devin.

Operator

(Operator Instructions). And your next question will come from the line of John Elhinger with MAST Capital Management. Please proceed.

John Ehlinger - MAST Capital Management

Good morning gentlemen.

Lee Fensterstock

Hi John.

John Ehlinger - MAST Capital Management

Can you hear me?

Lee Fensterstock

Yes.

John Ehlinger - MAST Capital Management

Just a quick question on your balance sheet, obviously with the growth of your revenue has come sort of growth in the securities owned in the liabilities side of securities at fair value (ph) goes. Can you talk a little bit about the netting of those two? Those two line items meaning, what's the sort of offset on the 619 million on the asset side and the 512 million on the liabilities side? Is the preponderance of that sort of the cross-trade, as taken on the balance sheet snapshot on December 31 or are those -- am I looking at that completely incorrectly?

Lee Fensterstock

I'm not sure 100% of the question, but the growth of the... our inventory positions are financed by our clearing firm. And the difference between the two is the capital that we post with them on margin. So it's really no more complicated than that. I'm not sure if I've answered your question.

John Ehlinger - MAST Capital Management

Yeah maybe, let me follow-up with you offline, because maybe I don't understand the two-line items sufficiently enough.

Lee Fensterstock

Okay. Basically we've a long inventory there. It's financed by our clearing firm. We have to post a deposit that represents our capital and the difference between the two-line items is essentially good capital that's on deposit at the clearing firm.

John Ehlinger - MAST Capital Management

It's okay. Good, thanks.

Lee Fensterstock

Okay.

Operator

And your next question will come from the line of Scott Appleby with Appleby Capital. Please proceed.

Scott Appleby - Appleby Capital

Good morning guys.

Lee Fensterstock

Hi Scott.

Scott Appleby - Appleby Capital

A couple... I'm trying to get overall understanding of your growth. You've mentioned that you're trying to get to $1 billion. I guess one, do you have a timeframe for that. Two, is it a stubbed function of employees or do you have other leverage points? And then, how much of equity, reliance on equity, will you be drawing (ph) at that part of your business more, continue to focus on fixed income? And then lastly, looking at your income statement, it looks likes you could -- you've got to room to grow investment banking?

Robert Turner

Well, I'll start, let me start. So first, on my general counsel, she won't let me put a timeframe on when. But, so I can't; I won't do that. But, in the reasonable playing horizons what I would say, and actually it's a function of the opportunity that we see in the market and the availability of talented people.

In terms of what the leverage points are, I would say that there are really two-fold and you actually hit on both of them. The first is to continue to track very talented people who can produce at the levels that we're currently operating. So, if we're able to continue the results in the fourth quarter which put us at 840,000 somewhat per individual. You can do the math and figure out what we need in terms of increased people to get, say another couple of 100 million of revenues, which ultimate would translate we think, into a firm that would $1 billion market cap.

So, one lever is attracting high quality, highly productive people of the same kind that we've already done over the last year. Remember, we have hired 243 people and that's where the productivity is coming from.

The second leverage, one you also mentioned, which is really investment banking. The business that is currently constituted is the institutional sales and trading business and we're very pleased with our results. But it's also fair to say that investment banking is an even higher margin proposition in the form of the advisory business. And if we ever get the capital markets to open, which they will happen at some point, you wind up then with tremendous leverage, in terms of the revenues in the bottom line.

So in summary, I think the two points of leverage are more individuals and are investment banking and less capital. We're not looking to build our business around capital. We're looking to build it around quality people, who can deliver advice and execution to both the institutional side, which is what we've been doing and we think a huge opportunity using investment banking.

Scott Appleby - Appleby Capital

Alright.

Lee Fensterstock

Now, the question on equity business. We are -- we do want to build out the equity business also, it will be opportunistic on kind what the market will give us, but there is obviously a lot of talent that's available right now.

Scott Appleby - Appleby Capital

Thank you. And just a quick follow-up, where are we and maybe this is best for Robert, where do margins go, if you double your business. I guess your 500 million in revenue, where are your margins?

Lee Fensterstock

20%.

Scott Appleby - Appleby Capital

Okay.

Lee Fensterstock

I mean we -- that's the goal. And Robert says that we have -- I'd indicated we'd restructure the company. We've done that. I indicated we were going to get profitable, we've now done that. Our next goal is to get to a 20% profit margin. And you guys will see how we do each quarter.

Robert Turner

Terrific. Thank you.

Operator

(Operator Instructions). And your next question will come from the line of Lauren Smith with KBW. Please proceed.

Lauren Smith - KBW

Hi. Good morning.

Lee Fensterstock

Hi Lauren.

Lauren Smith - KBW

Apologies if I missed the first five or six minutes, but I was just wondering if you could provide some color around the expense side of things. And perhaps update as where you are with respect to your savings initiatives that have been implemented I guess, over the course of the year. And as you think about the next 12, 18 months, certainly you are in growth mode, but are there any areas where you think there is a potential for maybe greater savings than maybe you had originally thought?

And then secondly, on the comp side, how are you thinking about the compensation (ph) revenue ratio in this kind of environment looking out the next 12 months. And in a more normalized environment what might be the band of the range with which you'll look to run your business. And then just lastly on the comp, mix of cash and stock, thank you.

Lee Fensterstock

Okay.

Lauren Smith - KBW

Sorry.

Lee Fensterstock

That's a long list.

Lauren Smith - KBW

It's a long list, but...

Lee Fensterstock

That's fine, it's a real good question. So in terms of the savings and sales, I would say that we've pretty much wrung out through our restructuring effort, a bulk of the dollars that we are going to get with one exception.

We still had in this quarter and it will bleed a little bit into the first quarter. We still have legal expenses associated with, what I am going to call, legacy issues, but those are kind of as we stand, right now, done. So from a savings point of view, that still affected the fourth quarter, but that will be finished. So in terms of restructuring et cetera, we're done. I mean I don't see huge opportunities there.

As far as compensation is concerned and ratios and so forth, in order for us to get to a 20% margin which is the goal, we are going to run at somewhere between 65 and 70% of total comp to revenue and 10 to 15% non-comp to revenue. So that will give us in advance, probably a 20 to 25% margin.

As far as the mix of stock component, a core element of our strategy has been in acquisitions won; and we have, as you can see, in the breakdown of our numbers, a portion in stock. Other than in -- and so I say in terms of recruiting, we're going to continue to provide some additional incentives in the way of equity and it's our intention that everybody at Broadpoint should be a shareholder. So, it will be an element of everyone's compensation going forward.

Having said that though, one of our great competitive advantage is, is the fact that we do take people for production and that's going to be mostly cash. So on an ongoing basis; I don't envision having the type of comp structure that some of the competitors had which they are paying 20, 30, 40% in stock. We see it as a huge competitive advantage to pay, by far the majority of our people in cash.

So that in terms of a comp going forward, I'd say we're talking about more like 10% to give people the incentive to perform further from overall, but at the same time giving us an ability to recruit very effectively in the marketplace with a substantial cash component.

As you know, many people are now paying their organizations large amounts in stock and other securities and so, one of the reasons we've been able to be very effective in recruiting, is that we don't do that. So we try to get the best balance between cash and equity interest.

Lauren Smith - KBW

Okay. And just one last question shifting gears on -- with respect to the balance sheet, obviously given your business mix, you look across the mid-cap institutional brokerage firms. Your leverage ratio clearly is at the higher-end along with Jefferies, but how are you particularly in this kind of environment and sentiment and the like, how are you thinking about leverage and tolerance and just kind of how are you're thinking about the balance sheet in that regard?

Lee Fensterstock

Okay. I think first of all, the comment I would make is, with total long-term funding stores, we've got 125 million and our total balance sheet is kind of 5 to 1, which puts us about half, I think with Jefferies is.

Lauren Smith - KBW

I'm sorry; I was looking at adjusted leverage, but...

Lee Fensterstock

Yeah, you'll know better than I would. But, I mean I'd think we're dramatically less levered than they are. And I would say that secondly, the balance sheet that we have got is comprised of mostly government agency securities, so the quality of the assets is extremely high.

And finally, I think this is kind of a leverage ratio that I'm comfortable with; kind of the 5 to 6 times, at this point. So, we don't see again, we don't see using the balance sheet as the real kind of the driver of the business.

Lauren Smith - KBW

Great. Thanks for taking all my questions.

Lee Fensterstock

You're welcome.

Operator

(Operator Instructions). And there are no further questions at this time. This concludes the question and answer session.

Lee Fensterstock

Okay. Thank you everybody.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.

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