Merriman Curhan Ford Group, Inc. Q2 2008 Earnings Call Transcript

Merriman Curhan Ford Group, Inc. (MERR)

Q2 2008 Earnings Call

August 12, 2008 11:00 am ET

Executives

[Landon Baretto]

D. Jonathan Merriman – Chief Executive Officer

Peter V. Coleman – Chief Financial Officer

Presentation

Operator

Welcome to the Merriman Curhan Ford second quarter conference call. (Operator Instructions) And I would now like to turn the conference over to [Landon Barretto].

[Landon Baretto]

My name is [Landon Barretto] and I'll be the moderator for today's presentation, which is being recorded and will be accessible following this call until midnight on September 11th, at 800-405-2236, code 1111718. It will also be archived on the Merriman website at www.merrimanco.com. Please go to the investor relations portion of the website.

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

In compliance with SEC requirements, I must read the following statement. Except for historical information, the matters discussed in the 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 Coleman

Thank you, [Landon]. Thank you, everybody, this morning for taking the time to call into our call. Given that I'm a recovering research analyst, I will spare you the reading of every single number and try to hit some of the highlights that I think will help you better understand our business.

Just jumping right into it, revenues for the quarter were done 22% to 15.8 million. This is primarily driven by reduction in our principal transactions or our proprietary trading business, as well as investment banking. On the principal transaction side, revenues were down 75% on a year-over-year basis; however, the propriety business did put up almost a million and a half gains in the quarter.

This is offset when compared to last year's significant outside gains that we experienced with our points position in 2007. So, principal transactions actually are still relatively healthy for the quarter, just a tough compare.

On the investment banking side, revenues down 21%. As everybody knows, this has been a challenging environment in the investment banking business. We've seen little relief in the second quarter as it relates to the ability of getting deals done. Having said that, we were able to put up five types, one private and two public offerings; however, the actual revenues per deal are down on a year-over-year basis, just over half a million dollars versus just over 800 in 2007. So, still a difficult market on the investment banking side.

On the positive front for revenues, our commission business remained pretty solid; up a couple of percent, and our primary research, which is the Panel acquisition from last year remains very strong, up almost 60%. Our other revenues, which include several of our other C-based business, especially our OTCQX business, also has seen significant growth in the quarter, up over 50%.

I think also important to note, total reoccurring revenues were approximately 26% of revenues versus 14 on a year-over-year basis. So the business still is driving as much as it can towards the C-based business, as opposed to some of the more volatile revenue.

On the expense side, expenses up 26% to 22.7 million. This is driven by a couple of areas that I will touch on. Professional services, as I'm sure people have seen, up 250%. This is largely attributed to the increase in legal spend as it relates to several of the legal situations that Jon will touch on in his comments.

In addition to that, we chose to take an impairment on goodwill. This relates to the Panel acquisition in 2007. We're required on an annual basis to review the goodwill, which we did in the April timeframe. It was decided, based on where the business plan was when we acquired the business, that an impairment was necessary. We chose to do that in the quarter. However, what I will say on the Panel business, as I noted on the revenue side, the growth there remains quite solid; however, that's not necessarily the test for impairment.

When we looked at the original valuation, it is down from the original expectation in the business model. That's largely attributed to what we'd expected to see in the financial services sector, which, as we all know, has been quite challenging. The healthcare portion of the Panel business remains very strong. In addition to that, there was an offset – a positive offset on the tax side where we had a reversal in accrual of 1.8 million. This resulted in a net loss of 5.1 million or a loss of $0.41 per share. I would also note it's important when looking at this loss, when you add the goodwill impairment, plus our increase in legal costs, that totaled about 4.4 million of the total number.

Moving on to liquidity and the balance sheet, which I know is something that is near and dear to everybody's heart, the company did end the quarter with cash and marketable securities of 26 million. This is versus 23 in the first quarter. The balance sheet remains very clean. The only debt we have is a verbal note, which was converted into stock in the April timeframe. So the balance sheet remains very clean and our eye towards remaining – keeping our balance sheet as liquid as possible. We continue to take opportunities in our restricted and warrant portfolios to move debt into more liquid form. So the balance sheet, again, remains quite solid.

So in conclusion, while everybody, I think, is quite well aware of the difficult environment, from our standpoint the key here is for us to remain nimble and responsive. And so in that regard, what we have undertaken following the quarter in the August timeframe, this phase one of cost control, as we commented in the Q, we have taken a reduction in staff of approximately 20%. Combined with some other expense controls that we have put in place immediately, we anticipate saving over seven million annually from operating expenses.

We will be moving on to phase two, which is really more of the go-to-market strategy, which Jon is going to touch on. Jon?

Jonathan Merriman

Thanks, Peter, and welcome aboard. Peter's really jumped in with both feet and done a great job for us in obviously a challenging period, and thank you, everybody, for joining today. Obviously, it's a tough quarter for several reasons. I'll run through the components and what we're doing to come out the other side much stronger and stronger for the long term.

First — the tough stuff first. On a legal situation, I have to be careful on disclosures, but I want to point you to our 8-Ks and our recently filed 10-Q for detail. Everything substantive in the 10-Q has been previously disclosed in the 8-K, but to reiterate what we're doing. First, we terminated the retail broker in question. Second, we've determined that no client suffered any direct losses from accounts held at our firm. Third, we are in the process of phasing out high net worth client retail, which is less than 1% of our revenues in 2007, and finally we believe we have strong defenses in the matter of the lawsuits and intend to defend them very vigorously. We'll open for questions on that later on.

Turning to the overall business, macro-wise the first half of 2008 was brutal. As you all know, that's the worse period I've experienced in quite some time. Small and micro caps in particular, were decimated as liquidity in this sector was very, very poor and the buyers for deal paper virtually disappear.

Many of our hedge fund clients were hurt and quite a few closed their doors. These clients are often the incremental buyer for investment banking products. Without them, the deal environment slows dramatically, as Peter alluded too. U.S.-listed IPOs declined 80% to 11 offers, from 56 in '07, and the technology sector has done only six IPOs this year.

In terms of our banking business in specific, we hung there, exceeded the analyst's expectations slightly, up 34% Q-to-Q. CleanTech continues to be a very strong area for us, given the marker that we put down there years ago. In terms of the pipe market, we are number five in the U.S. in terms of placements this year, which is great, but it also shows how few people are doing deals in 2008.

Our pipeline continues to be robust, but there is a definite push out in terms of timing, how long it takes to get the business closed. There's also a higher rate of non-completion and as Peter mentioned, the fee sizes have diminished somewhat. I do believe, however, that the unwind of the massive commodity up-trade that we're seeing in the markets currently will help the overall banking environment in the relative near term.

Our commission business was flat as just Peter said. That area continues to be challenging over the long term, as per share commissions drip lower and the willingness of the buy side to pay for traditional research diminishes. Our plan is to move – is to more effectively combine our traditional research with our primary research product, to create differentiation and help drive commission business that grows, instead of fighting to stay flat.

We have charged Will Febbo, former CEO of Panel, and one of our board members, with overseeing all research efforts in the firm and to bridge the gap between primary research and the traditional sell side research. It is crucial to be most active where we are differentiated, and we believe we're very differentiated with our primary research product. Our traditional research, I think, is excellent, but we need to get paid for it. Again, I think this combination will help make that happen.

Our principal business recovered from the loss in the first quarter. We position ourselves pretty well, in terms of the oil trade for example; that helped us out. As I mentioned earlier, I think that's going to going to continue to have important near-term ramifications for the overall market. We were well positioned in 2007, got hurt badly in the first quarter of 2008, but feel good about some of the more significant positions we have on now. We still have a position at Points International; continue to very much believe in that situation. We also have a position in a gold and silver exploration company, GoldSpring, which is beginning to perform pretty well.

Other lines of business, ICD continues its strong performance, despite some headwinds, and our Panel business as Peter mentioned, was up considerably year-over-year. Internally, we view these businesses as being the more recurring lines of business than investment banking or commission biz. As such, we are trying to increase, every day, our view towards more recurring revenue. Total recurring revenues again, were 26% of total revenues compared to 14% in the second quarter of last year.

I want to touch a little bit on OTCQX Advisory business that is accelerating. We listed our seventh and eighth international corporate client in the past month. We were the leading investment bank in QX Advisory business, which we think has considerable opportunity for growth.

As a reminder, QX enabled foreign companies to trade their stocks in the Unites States without having to pay for Sarbanes-Oxley. We think the QX growth with outstrip that of the AIM market over time. It also helps lead us to investment banking business we would not see in foreign markets and we're very excited about that potential.

Our asset management business, one of the game plans here is focusing on launching new CleanTech venture and hedge fund products. As you know, CleanTech's always been a big area of strength for us. The bulk of our – to bolster our expertise in this area, we brought in Tim Newell, who was part of Bill Clinton's environmental team and a veteran CleanTech VC to head CleanTech strategy across the firm. We think Tim will bring a lot to the party in this area.

As Peter mentioned earlier and we discussed in the 10-Q, last week we had a reduction in our workforce. This is an incredibly difficult process, particularly for a firm that's as collegial and as close as ours. We really looked hard at the current business, the current marketplace, the current team, and we made decisions on who we would hire today, not necessarily who we had to let go. So we feel very good about the current team. Again, a very difficult process, but we can't put our heads in the sand. We have to acknowledge the environment and react to it.

Over the next month, Peter will lead implementation of more stringent cost control measures to help lower our ongoing T&E expenses. T&E, for example, increased by about 330,000 or 48% from the second quarter of 2007 to the second quarter of 2008. We have to do, and can do, much better on the cost control front, particularly with regard to monetizing our T&E expenses.

Overall, as Peter mentioned, the reduction in force is aimed at generating around 7 million in annual expense savings. Coming out at the other side of this tough period, I believe we'll have a considerably lower breakeven and plan on getting back to consistent profitability.

I want to highlight what Peter said. In terms of the balance sheet remains very solid; 26 million in cash in marketables and no debt. We have runway to work through the very difficult environment on the legal front, as well as the challenging market environment.

In conclusion, the game plan is simple, but not necessarily easy. First, we need to move the legal hill one rock at a time every day. We have run a squeaky clean shop for over six years and we will not let the action of one individual ruin what our team has built.

Second, we need to permanently lower our breakeven and keep our balance sheet strong, because we know that the firms that come through this period will benefit greatly. We have taken active steps to do this, as we have discussed.

Third, we have aligned our senior management team to be positioned to generate revenues. Greg Curhan, for example, running CleanTech. Rob Ford is overseeing OTCQX, Corporate Services and ICD and is purely focused on driving revenues now. Brock, as you know, is running distribution and banking and Will Febbo, as I discussed, is working on the monetization of our research product.

I am focused on generating banking leads, helping pitch the firm's capabilities to both new hires and new clients, and also I'm focused on deploying our capital effectively. Peter Coleman, as I've said, has jumped in with both feet overseeing finance and operations, and in overseeing the operations he's freeing up Rob Ford, who used to run that area, to generate revenues.

So senior management's firmly in the trenches. We're definitely not in the ivory tower right now. We have a great team of people and I'm confident that we will prevail over the long term. We appreciate your support. We appreciate you joining the call, and I'd now like to turn to questions.

Question-and-Answer Session

Operator

And at this time, we have no questions.

[Landon Barretto]

Okay, Jon and Peter, is there anything else you want to say before we go?

Jonathan Merriman

No, thank your support. Welcome aboard, Peter and let's get back to work.

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