Jon Merriman – Co-Chairman, Co-Founder and CEO
Will Febbo – COO, Director
Stanley Wunderlich – CFSG1
Merriman Holdings, Inc. (OTCQX:MERR) Q2 2014 Earnings Conference Call August 14, 2014 4:30 PM ET
Greetings and welcome to Merriman Holdings Second Quarter 2014 Financial Results Conference Call. (Operator Instructions) I'd like to remind listeners that during the call certain information presented contains forward-looking statements. These statements are based on management's current expectation for their subject to risk, uncertainties and their functions. Potential risks and uncertainties that could cause the company's business and financial results to differ materially from these forward-looking statements are described in the company's periodic reports filed with the SEC from time-to-time.
All information discussed on this call is as of today August 14; Merriman Holdings does not intend and in order takes no duty to update future events or circumstances. It is now my please to introduce your host, Jon Merriman, Co-Chairman and CEO and Will Febbo, COO and Director. Thank you, Mr. Febbo. You may begin.
Thanks, David. It's been sometime since we had an earnings call. We both Jon and I felt, this is was the right time to actively engage with the investors and give more color on our current business. I will not be reading the financials from the script as we have plenty of details included in the Q and our press release for everyone's review and our business is much less complex, today.
Please feel free to reach out to Jon and I directly, if you have any questions on those filings. As seen from our press releases, we have started to see strong execution against the plan to bring a differentiated model and increased value to clients, employees and shareholders in Merriman Holdings. As we have highlighted in our filings and press releases for sometimes, we worked very hard in 2012 and 2013 to bring the variable cost model to the traditional broker-dealer business.
Particularly the execution in trading and banking business, while growing and recurring revenue business and advisory under innovative public and later stage private companies. The intent was to bring overhead down to the level, where net income is achievable with less dependence on difficult to predict business lines.
Our growth and revenue in banking at 187% and in our commission and advisory business at 30% from the first half of 2013 to 2014 is a great demonstration of the team and clients in our universe. It's important to note, that we have also reduced our compensation cost as a percentage of revenue from 72% to 48%, when comparing first half 2013 to 2014. A meaningful number to watch in our industry.
There is a been a considerable reduction in the number of full service broker-dealers especially those in San Francisco, while the needs of the company's issuers continue to be robust and the market is large with companies with need growth capital and capital market services in the sub $100 million market space.
As a result, we continue to augment our commercial and operational team to grow and service our client base in the business. While we've not seen strong growth in our Capital Markets Advisory group over the last six months with recurring revenue, we have seen good increase in commission revenue from corporate services as well as banking, which was up in from the advisory client's relationship.
Revenue scale of the recurring revenue line is a very powerful in our business and we continue to enhance the team to grow that segment. We currently have 55 clients in diversified industries. We now cover seven different industries strongest in tech, media, healthcare resources at [indiscernible], but others have been added as well.
With the continued strength in some larger [ph] banks in the boutique space, there is a large population of license professionals looking for a way to monetize their network in a compliant and professional way. We are starting to see nice growth in our financial entrepreneurial platform. We've spent a significant amount of time responding to you and looking for teams and professionals, who are in need of the broker-dealer infrastructure and compliance, but prefer to be independent.
We called every financial entrepreneur first. As a reminder, this gives Merriman Capital a unique opportunity and differentiation in the industry about generating revenue from otherwise inaccessible networks or relationship while keeping our fixed cost down.
There is also a network affect, which helps blow distribution for all parties in a compliant transparent way. We currently have 30 members of the FFE [ph] and we are seeing nice growth in this area over last year and are very encouraging, the new teams we've brought in on the first half of 2014.
This is a quality over quantity strategy, but given market conditions we still believe, this is a great solutions for those, dislocated from larger banks with great relationships to monetize. In our goal, to shift our business towards the digital capital movement. We acquired a financial platform in Q3, 2013 from a Group, which included the CEO of SunGuard's Wealth Management Group, Bob Ward.
In Q4, 2013 we launched Digital Capital Network, we called DCM. Aside from Bob joining our board, we also started working with the technical team with background in multibillion platform such as Envestnet, Stamps [ph], etc.
We are particularly excited that the potential of this acquisition and it's clear that there is a lack of investments within our space and technology. Our industry is now, much more comfortable networking, trading, researching and investing with internet based networking like LinkedIn [ph] trading, like eTrade and researching like we do with Bloomberg, all this sets up in active educated user base of high network, spanning office an institutional investors, which will demand a technology driven delivery backed with the licenses and informed professions to make investments decisions.
We believe, that brings scale, differentiation, compliance and better services to our clients while leveraging our existing strategy. In short, Digital Capital Network offers investors, issuers and affiliates of a compliant solution evaluating pre-screen transactions and multiple financial structures and verticals on one platform.
The DCM provides its members with a diverse little cost effective transaction portal, the closing gap between business and growth capital. We currently have over 300 active users in the DCM, 14 unique private placements tumbling over $200 million in offerings and alternative investments.
We had placed $23 million in deals over the last six months and we are adding sales people to facilitate more closing of issuers and products which meet the criteria for listing on the DCM. Again we are seeking a great pool of professionals with great selling experience in capital markets, but they're needing to rethink how they apply that skill and again network using technology.
But now with DCM and the traditional broker-dealer business leverages our history as a full service broker-dealer, our existing strategy of recurring revenue and bearing below our head model, best-in-class compliance and importantly add scalable distribution and broadens the types and sizes of deals we can take on and positions us for what we believe capital markets will demand.
I look forward to sharing our progress during our next call and feel free to call me directly always on any financial or operational issues or commercial issues. I'll now turn it over to Jon Merriman, our Co-Chairman and CEO.
Thanks, Will great job and thank you, everybody for joining the call today. As Will indicated, we'll start giving investors more regular updates and regularly quarterly con calls as re-begin, the process of investor outreach. As Will commented, we are very pleased with our progress in the first half. We are very excited to no longer be bearing the burden of the legal business transitions over the last five years.
Now that that's behind us, I can squarely focus on new business revenue generation, new idea generation and help Will with building of the DCM. I would like to amplify and some of Will's comments about our expense control. I think it's a significant accomplishment for our team to grow the businesses through actively as we did in the first half, well dramatically lowering our expense ratio, 48% is very low for our industry and definitely lowest in the firm's recent history.
I do want to caution investors, however with this level, we may not be sustainable every quarter, but I can promise we will continue to be relentless on the expense side. With regard to our revenue growth, I'm particularly pleased that we continue to see strong progress on our corporate services business which encompasses our advisory, trading and execution lines.
The mission there is to service corporations with regard to capital markets advice, intelligent focus to market making and trade execution. As more and more firms exit the small and micro-cap market, we see a growing opportunity to help solve our client's issues in trading these illiquid often undiscovered equities.
We are proud with our excellence and service in the trading with small cap stocks and we do believe it's a point of competitive differentiation for our firm. A strong and growing corporate service practice also leads with banking opportunities, which we do approach very selectively.
Our core banking product and process has begun to be helped considerably by digital capital network, which Will discussed in details, so I'm going to stay at very high level. What really excites me personally, is that DCM gives us the ability to sell a much broader, larger five line to a much more diverse and larger group of investors.
We expect to be offering some additional highly differentiated asset classes in the near term that we believe will be a great interest and literally any type of investors, a major institution, family office, large and small hedge funds and ultra-high network investors.
Our DCM focused today, is augmenting our existing deal flow, is best-in-class technology that greatly strengthens the transaction, compliance and deal management process. Compliance is obviously critical and the DCM is a great tool to make sure that all boxes have been checked, all the time.
The next step in the DCM evolution as a user base grows towards avenue full on execution platform, one that truly simplifies and radically shortness the capital raising process for small public and private companies. The profit today in the analog world is slow and cumbersome as we all know.
Our mission to use technology to not only strengthen the compliance and deal management side, but to dramatically speed the process of getting companies the sophisticated investors and capital needed to help them grow their businesses. In short, we view the DCM as a curated [ph] compliant crow funding for institutions.
We believe at the DCM platform alone is worth much more than it's reflected in our current valuation, given many of the public and private platform comparables that are out there today. It is up to us obviously to monetize the platform and then walk that value.
In closing, I would like to empathize that we are one of the last remaining technology focused banks in the San Francisco Bay area and there is an enormous opportunity we have just by occupying that position. I believe that we have the right team members as well as the ability to access a large pool that displays talent to help us attack the opportunity.
We've created significant shareholder in our first growth run from 2002 to 2008 and we are dedicated to rebuilding that shareholder value again. With that, I'll turn to questions. Thanks again for your time today.
Thank you. (Operator Instructions) our first question is from Stanley Wunderlich of CFSG1. Please proceed with your question
Stanley Wunderlich – CFSG1
I've had couple of questions. Number one, your GAAP numbers, I've just had the opportunity to look at them, they're just super and comparative numbers. I'm somewhere curious about the DCM and are you going to unlock the value and I'm also curious about just enterprise value in general and how you see yourself in comparison to maybe some of the other public companies.
Years ago, we saw the average Frans and Montgomery, the Robinson Humphries and we were able to get one and make some money. How is some money going to be made here, what are you guys looking to do as well move forward?
Thanks for your question, Stan. So I think with regard to the DCM and potential value, as our recurring revenues increased and user base grows in the DCM. I think, we can start to approve significant value to the platform. As we get speed the transaction and closure on more deals, as Will noted there is roughly $200 million of product on the platform.
We expect that number to increase dramatically in the near term. As I pointed out some differentiated products and some products I think, that is not being offered, on some of the other platforms out there today. So we are excited about that. We are going to have to drive value just by sheer hard work, monetization, bringing users. We're in the kind of the muscle phase of the growth rate now.
We've got a muscle to users on. We've got to close the transactions, but every day we add users and as I said, some of the new product that we are going to be having in near term, I think will sort of pop the growth there. Will?
Yes, I'll just add that we recently added two new dedicated sales people, who will be reaching out to investors almost in the traditional sense, but if you think the day in the light of future sales, now we've come in, you see a dashboard, you get all the information in one place [indiscernible] for multiple cause and then you use that as your hit list. You wake up, you look at the dashboard. You reach out to investors, but it is still people business and I think it will for a foreseeable future, but we've built the technology again reducing the time to get our clients the money, which is really, why we are here?
Stanley Wunderlich – CFSG1
Well, congratulations on a great quarter.
Our next question is from Carl Franklin [ph], private investor. Please proceed with your question.
The DCM, it's obviously very exciting with what's going on in the capital formation, without funding the distinct change that's turned over. Could you just go into, you touched on some the – Will touched on some of the human quality, could you touch on how an actual process takes place, to somewhat do one, hundreds of people that are tapped into the system. Did – we just see an email and it's their responsibility to open it up and see if it's of interest or is there a human quotient, but kind of follows up and focuses into take a look at it and how does the transaction proceed?
Great question. So what we've been on is, we designed. It's first of all an investor would need to register and opt in, so we can assure that they're accredited or high net worth individual and in doing that, they actually set their preferences. So they let us know, what they like to see, what they don't like to see and when we have a new offering that has gone through the full compliance, due diligence committee and is ready for marketing, they will get an email, unless they've told us they do not want to get an email.
And that email would be a teaser, generally does not mention the company name. it just gives broad strokes and it encourages them, if they're interested to then log into the site and take a look at the data, is which is what we call and that's where you have a company overview, management profiles and let's say, we've gone through that process.
Once you're in there, obviously you can't see anything that's not public until you've signed an NDA and we'll facilitate that process by having a new NDA or you can sign one, send it in. again, all things are approved along the way and then eventually you get to pull documents, if you so choose, but if you just read the overview and you wanted to talk to a person quickly.
There is always a contact name and phone number, you can just click on the name that sends an email and you'll get a call very quickly.
Hi, Carl. One of the things I want to add to what Will is saying, is the dimension that we're trying to reach here is that there is a very kind of close ecosystem around Silicon Valley and we think that there is an enormous opportunity and obviously enormous pockets of capital in places other than believe it or not San Francisco.
So there is a lot of investors and say, Minnesota there is interesting company and Minneapolis and [indiscernible] from all over the country, that we are getting on a DCM and we are getting sophisticated family office investors with substantial capital to invest coming on a DCM that may not be able to avail themselves of the deal flow that Silicon Valley to swamped to have, right so sharp investor with a large pool of capital.
In Baltimore, Maryland is just a good investor and in some cases, they're better investor then maybe someone who is very Silicon Valley centric. So as we kind of try to broaden that user base out, seek the opportunity.
Sounds like a great platform. Is there, any facility in terms of with the longevity that stays on the system. Obviously, there's got to be a timeline that it's really hot and people want to talk about it and do something, it's been on the system for six weeks or eight weeks or something like that. it's kind of like the old bread, is there a way of like revitalizing this or bringing it to the forefront again, kind of as reenergizing profits?
Absolutely, yes. It's like any deals, you just use the technology. So you really, you basically do a couple of things. We did that initial teaser, we can obviously see who sees what, so it's easy to see what kind of tension you get initially. We see enough, we'll actually hold the conference call with the CEO, invite those people and others to listen and that's facilitates a go or no-go or a structured discussion or a valuation discussion.
And then, that's why we are six weeks out, we've done those things and it's gone quiet. The teaser can be sent out again. we also have other partners that have developed very compliant distribution lists to other communities that we don't know and again technology is your friend there, you can reach them and obviously we're broker-dealer, so we know how to do that in a compliant way.
So there is multiple methods of some mixture of technology and old school, but you really want to get people talking in end, that's what we want.
Okay, great guys. Yes that sounds very exciting. Thank you, very much.
Our next question is from Eric Cash [ph] with CFSG1.
Two quick questions, first is how sticky are these execs, that you pick, you're picking up either brokers who have left the business or a downsizing to your space or you're picking up some investor bankers, who have been disowned by other firms. How sticky are they as employees? And second question is, if I'm doing a value spread, if I'm paying say for a typical offering and I'm using your new platform, what savings would I get as an issuing company?
So, Eric it's Jon. I'll take the first one, I think you know we're seeking to do in the financial entrepreneur platform is that [indiscernible] continues to grow and then we've refined the process I think Will commented, we're looking for larger groups and people that are more experienced, with a deeper book of business.
So I think there is a selectivity factor there that we are deploying and I think that's helped us with regard to our longevity for the people on the financial entrepreneur platform. The first team that we deployed on the platform, streak [ph] is been about 3 years, 3.5 years and it's a great team of guys based in New York, we work very well together and I would say, that we approach our financial entrepreneurs.
Really as partners in our business, they're engaged in a network and part of our initial evolution around the DCM was trying to make a way for everyone to communicate about deals better within our network and that's kind of blown into what's now become a digital capital network, but we view it is as very important that financial entrepreneurs are engaged in the process of this year of the flow and that they're value clients of the firm and partners.
That's right. I would just add that, off the cheeriness [ph] there. We obviously watch the activity and if there is a not a lot of activity, we can create the churn ourselves. It's better to have people who are productive on the platform and we need to keep an eye on that, from the regulatory standpoint.
In terms of you question on the spread. What we – the initial savings is, it's not a long-term retainer. You know a lot of banking relationships you've got a monthly retainer. This is a one-time investing fee and then right now, we charge 8% and the best effort is 12-month engagement, that can vary by product, by stage, by selling group as you know it and 10%, but the majority of them are average size and the platform today is about 8 [indiscernible].
Thank you very much.
(Operator Instructions) There are no further questions at this time. I would like to turn the floor back over to management for closing comments.
Well, that all we have for today again feel free to reach out to Will, Mike or myself if you have any questions about process, about the DCM, about the ongoing business, we welcome the interaction. Thank you again for taking the time today.
This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.
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