Cowen Inc. (COWN) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning. Thank you for joining us to discuss Cowen's results for the first quarter of 2021. Now I would like to turn the call over to Mr. JT Farley, Cowen's Head of Investor Relations.
James Farley: Thank you, DD. Good morning. Thank you all for joining us. By now, you should have received a copy of the earnings release, which can be accessed at investor.cowen.com. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC. Cowen has no obligation to update the information presented on today's call.
Jeffrey Solomon: Yes with -- Cowen's strongest on record in terms of both revenues and profitability, surpassing the previous record we set in the second quarter of last year. What is equally impressive is the breadth of the operating performance across the firm. We generated record results in investment banking in markets and impressive performance at Cowen Investment Management, which set new records for management fees as well as carried interest and incentive fees. Also, please note that as we exhausted our NOLs in 2020 and are now a cash tax payer in the first quarter of 2021. Our financial performance builds upon our record results in 2020 and demonstrates the consistent earnings power we have established over the past several years through acquisitions as well as strategic investments in our team and our capabilities. In recognition of this fact, Cowen's stock has risen in value significantly in recent months. Nonetheless, we believe that our valuation is still compelling as the factors driving our profitability and growth are not yet fully recognized by the market. Our team continued to work hard to deliver results for our clients, even as we continue to grapple with the challenges of working in a remote environment and the ongoing pandemic. Here are some of the highlights. In Investment banking, our momentum continued with the second consecutive record quarter. Revenues were up over 190% year-over-year. And in the last 2 quarters combined, we posted more than $500 billion in revenues, which is well in excess of our total banking revenues for the entire year of 2019. As we've said before, Cowen's mission is to connect and advise aspirational investors to disruptive companies who have shared a quest to outperform. Our team is delivering on this mission. And as a result, we are building long-lasting relationships with our clients. In fact, about 50% of our banking revenues in the first quarter came from engagements with repeat clients, which is an important metric. We were recently named the mid-market equity house of the year by international financing review for the third year running, the true satisfaction we have comes from knowing that we are helping companies and investors to achieve their goals by doing what we do best. We also generated record capital markets revenues of $238 million, comprised of $161 million in underwriting and $77 million of capital markets advisory business, which consists of private placement of debt and equity as well as private investments in public equity. It was our second best M&A quarter with $56 million in revenues, driven by a number of large completed public deals. M&A and capital markets advisory combined represents 45% of total banking revenues for the quarter.
Stephen Lasota: Thanks, Jeff. For the first quarter of 2021, GAAP revenue was up 283% year-over-year to a record $754.3 million from $196.7 million. We reported GAAP net income attributable to common shareholders of $145.8 million or $4.34 per diluted share, up from a GAAP net loss of $11.6 million or loss of $0.41 per diluted share in the prior year period.
Jeffrey Solomon: Thanks, Steve. As you can see, it was an exceptionally strong quarter. While some of these tailwinds could moderate in coming quarters, we're still well prepared for continued long-term growth due in part to our leading market franchises in key industries with attractive future prospects, such as biotech and sustainability. We also have robust and expanding product capabilities in banking, institutional execution, world-class research with our differentiated investment management offerings. As I noted at the start of the call, we believe the market has not yet fully cut up to the reality of our business momentum, and Cowen's stock is still trading at an attractive earnings multiple. The investments we've made, the strategic decisions we've taken, and most importantly, the talent and dedication of our team are likely to continue delivering outstanding results for all of our shareholders. As we look ahead to the balance of 2021, we believe we'll be able to return more of our team members to offices in the coming months, but we will only do so when appropriate. We are focused on making sure that our team members have the support they need to work effectively and to remain healthy wherever they're working. We will continue to use the same guiding principle that has served us so well since last March. The safety of our colleagues and their families will always come first. And with that, I will open it up for questions. Operator?
Operator: . Our first question comes from Sumeet Mody of Piper Sandler.
Sumeet Mody: Congrats on the quarter and really the last 12 months. It seems like brokerage keeps getting stronger quarter-after-quarter, $3.6 million revenue per day, pretty impressive. We're just trying to get to the sustainability of these results. How should we think about the rest of the year? How do you guys think about that trajectory kind of internally? How much of the gains in the last 12 months across brokerage and services would you guys, say, are sort of market share gains that are sustainable versus kind of the related onetime activity spikes?
Jeffrey Solomon: That's a good question, Sumeet. And thanks for the recognition. I think as the business has gotten bigger, it's certainly more volume-dependent, right? And so I think you'll see our results trending more in line. When we think about levels that might return to pre-COVID, what our expectation is that we won't return to our pre-COVID levels. In fact, what we've seen is we've taken meaningful share. So should things moderate over the remainder of the year, we will just -- we'll moderate at a much higher level than where we used to be. And as a result, I think that's the kind of thing that we've been looking for. The whole goal here is to put in higher highs and higher lows. And certain things are outside of our control like the volumes. But even if volumes low, we're going to be at the high end of the market in general, and we'll be able to be in a position where our business is incredibly sustainable and profitable at those levels. So that's how we're thinking about it.
Sumeet Mody: And then just one more before I hop back in queue. Last quarter, you guys mentioned the goal was to keep the share count flat for the year, maybe there is one for Steve here. But given the increase in the share count after the converts have been retired, is that still a priority to keep that share count flat? And how should we think about the pace of repurchases throughout the year? Should we assume kind of the priority is offsetting dilution as opposed to being more price sensitive?
Jeffrey Solomon: Yes. So the goal is to offset dilution. And I think we have a couple of onetime events. Obviously, the converts is the biggest contributor. And of course, in the first quarter, we have a big vesting. So I think we always have challenges at maintaining that during the first quarter just given the limited period of time in which we have a window open. Certainly, our goal is to continue to shrink that count. And I think the guidance first time we've given is that we'll be in and around 25% to 1/3 of our cash flows we will spend on stock buybacks because we think that's an appropriate level. And we will absolutely continue to buy stock back. I think we recognize that we're moving from a book value story to an earnings story and in no small part due to some of the research that you and your colleagues have written, people recognize that. We do too. And so I said numerous times in the script that we're cheap. And so listen, I spent a good portion of my life learning how to buy cheap stocks. So as we continue to generate positive cash flow, you will continue to see us buy stock back. And I think the increase to $50 million, which is a record in terms of our willing -- our ability to buy stock back as an indication of that.
Operator: Our next question comes from Devin Ryan of JMP Securities.
Devin Ryan: Maybe I want to dig in a little bit on the investment banking commentary. I appreciate the outlook and some of the backlog comments. Maybe to touch on the SPAC market, which you highlighted a bit. You clearly have a great business there. And I'm just curious how you see things playing out from here just with, obviously, a little bit of SEC scrutiny and then maybe also some investor fatigue on the pipe side. You guys have been very selective around the sponsors that you work with. And so I guess I'm more approaching it from the angle of, does this create more of an opportunity to the extent it leaves out some of the maybe not as strong players? Just a little more perspective there, just given that you guys have a strong position?
Jeffrey Solomon: Yes. I appreciate that, and that is exactly how we see it. I mean, the toward pace of SPAC IPOs, nobody expected that in the first quarter. And you can see that we continue to be selective with the sponsors we choose because fundamentally, the only thing that works in the SPAC market we know long-term is you're going to actually deliver positive results for all the investors over time. And so we turned away a lot of business on the front and IPO part, in part because we felt that we needed to focus our energies and our efforts on the best sponsors in the market to deliver those results over the long haul. My view is that will continue, right? We'll -- regardless of the slowdowns, which SPAC markets, since I've been doing this 25 years, they have periods of time which they raise a lot of money and then periods of time in which the market has to go through a digestion period, and this is one of them. And so you may see front-end IPOs slow somewhat, but I think our -- when I look at what we have in front of us to execute between now and year-end in terms of the de-SPAC process, pipe raising and execution, it's incredibly robust. So we don't expect there to be a significant change. Most of our sponsors we expect will get successful deals done, and we'll be in the center of most of those.
Devin Ryan: And I guess, related question, just on the SPAC trading. You guys have kind of the leading business there, the highest market share by a long shot. I'm just curious kind of how the outlook for that business may trend from here? And how important that's been to what have obviously been fantastic brokerage results?
Jeffrey Solomon: Obviously, the more SPACs that are out there to trade, the better. I mean, that's pretty linear. So the fact that there's been a bunch of SPAC IPOs, even ones not done by Cowen, means there's a lot more trading activity in those spaces. And so that's actually worked out really well from us. I don't see that changing, right? Once the SPAC is public, it's public. They do tend to trade more when they go public and then when they announce deals. And so the more deals that get announced, you'll see a lot more trading. And so I just think when you look at the long-term trajectory of that business, it's a very meaningful market now and we continue to be the most meaningful player in that market. So I view that as a great tailwind in our business going forward.
Devin Ryan: Yes. Okay, great. Last quick one here for Steve, just on the non-compensation costs. Clearly, the variable piece is moving higher just from kind of extremely strong activity levels. But if we think about the fixed non-compensation, how should we think about the trajectory puts and takes from here or just as potentially people are kind of moving back into the offices and traveling again versus other kind of opportunities for savings?
Stephen Lasota: Yes. Well, the fixed non-comps should be steady, may increase slightly just for increased legal expenses and stuff like that, but related to investment banking deals. But on the variable side, we have, obviously, T&E in conferences and client development has been practically nil. We do expect that to start to pick up as in-person meetings but not to the levels that they were before. So maybe by the end of the year, we're at a 50% of what we used to do. So as we've talked in the past, we have budgeted for some of that for the back half of the year to come back.
Operator: Our next question comes from Steven Chubak of Wolfe Research.
Steven Chubak: So first question, Jeff, just as a clarifying question on the earlier discussion as it relates to how to think about normalization of brokerage activity. You did note that you're not going back to pre-COVID levels in terms of brokerage revenue per day, certainly encouraging to hear that commitment or expectation. At the same time, you did mention the $2 million in your prepared remarks. And I'm just wondering, should I view that as more representative of a floor in terms of what you think you can generate? Or is that your expectation in terms of what a normalized run rate might look like?
Jeffrey Solomon: I think that's a floor. I mean, I do. It's hard to see -- I mean, listen, I don't know what happens to volume. So I don't have a crystal ball. But I use that very much as a floor, given what we're seeing and given how the year has started out or how the quarter has started out. I can't see it being less than that for the remainder of the year.
Steven Chubak: Okay. Great. And then just on the capital management side, nice to hear also about the commitment to maintain pretty healthy levels of buyback. Now that you've largely optimized your liability stack and just given the sheer amount of free cash flow that you guys are generating, maybe you can just give us an update on just like your capital management priorities more broadly and more specifically your appetite to maybe expand inorganically?
Jeffrey Solomon: Yes. So I think the guidance we gave is the first time we're actually giving meaningful guidance this way in terms of what people can expect. I think as we monetize certain assets, you can probably expect more from us. I mean, I think we'll just -- we'll continue to tie those buybacks to moments in time in which we generate meaningful cash. I just -- I tied buybacks to cash too. So I want to be clear that there's elements of our earnings that are not readily turned into cash. So as we monetize those, you'll continue to see us return capital to shareholders. Listen, again, I'll say what I said earlier, the stock is cheap. And for us to be able to be in a position where we can generate positive cash flow and buyback stock, we will continue to do that because we see it. That's part of the reason why we made the comments we made. I rarely talk about the value of the stock in an earnings release or in an earnings script. But I'm saying it very clearly, we think the stock is cheap. And so as we have positive cash flow, we will continue to be aggressive at buying back stock.
Operator: Our next question will come from Chris Allen of Compass Point.
Christopher Allen: Sorry, I got on the call a little bit late. I may have missed this. I'm not sure if you gave an update. Just wondering following Steve's question on kind of the market -- sorry, the brokerage business, any color in terms of where the second quarter is running out to date? I mean, I'm just contextualizing that versus the volume declines you're seeing across the industry?
Jeffrey Solomon: Yes. I mean, I think what we generally do is give you, we're running north of that minimum number by a meaningful amount during April. So I think it's -- what we've done historically is to sort of bring you forward to today's date. And so the number I put out there, we're north of that number on a daily average basis for the month of April. And I think it says a lot because there were a lot of slow days in April. So again, this is why I feel comfortable with the guidance that we've given in that area.
Christopher Allen: Got it. And then just on the investment banking pipeline, helpful color on the SPAC side. Just wondering if you could maybe parse out where the pipeline -- where you're seeing strength in the pipeline? What are the kind of opportunities from an industry perspective are currently?
Jeffrey Solomon: Yes. So I think it's a couple of different areas. Mid-market M&A, we have a significant amount of sell-side that we've yet to launch. I think that's something that we expect to happen as the economy turns back on and sponsors start to become more active. So I think you'll see really continued strength there. I think if the SPAC back ends, we'll continue to see strength there. We actually made a couple of announcements already in the month of April with some meaningful M&A transactions that have occurred there. And again, I want to highlight to you and everybody. The conventions for the way that we report our banking numbers, you should really think about capital markets advisory and M&A as the same. Now we do it a little bit differently in our reporting than many of our peers. But if you were to compare us to the financial advisory firms, you really need to look at capital markets advisory business in M&A in the same bucket. That's $130 million, right, of -- for the first quarter, which is a record by a lot. And the reason you have to look at them the same is because oftentimes they're tied together where we're doing a debt financing that may be tied to an M&A or we win a piece of debt financing, that's a cash out refi. The economics of debt advisory very much look like the economics of an M&A advisory business. And our competitors, when they put their advisory business out there because they don't have capital markets businesses, they lump them together. So I think one of the things that we try to do is break that out for you, even though we report them as part of capital markets, you should really look at that because that for me is an indication that we're showing meaningful strength in our advisory business away from capital markets traditional underwriting business. And while I expect that to continue to also be strong, I can't think of a point in our history where we've been less dependent as a banking franchise on capital markets traditional underwriting activity. And this just shows the breadth and the depth of the investments we've made in personnel and teams. And so I just wanted to take that opportunity to maybe extend the comment a little bit more to highlight that to you.
Operator: . And our next question comes from Michael Brown of KBW.
Michael Brown: So it's nice to see the update on the target to shift to an after-tax basis from a pretax basis. And I guess I wanted to follow-up on Steve's question about kind of the -- where you may be focusing for growth in the business, but a little bit more from an organic standpoint? Obviously, in the recent years, we've seen a lot more benefits of the diversification of the business and seeing record results across brokerage, investment banking, investment management is great to see. So you're throwing up a lot of cash flow here. So where's kind of the next leg of growth for the organic side of the business? Where are you looking to put the incremental investment dollars? Is it still focused on the advisory business or are you looking to continue to grow, maybe prime brokerage? Curious what's top of mind for you guys?
Jeffrey Solomon: So let's start with industries because I think that's really been a key driver for us at Cowen. We tend to look first at industries that we think are going to be disruptive in part because that's generally the industries that will need our products and services regardless of where they are. So in the script, I went through some of the areas we're highlighting in research, in particular, with increased investments in health care and sustainability, which will continue to be key drivers for us. I think expanding into health care services for the first time in a meaningful way or in a long time with the hiring of a senior analyst in that area. Within the subcategory of life sciences, generally, the real growth in tools and diagnostics, which I don't think people understand actually, we tend to lump everything together -- where people tend to lump everything together when they look at biopharma. There's a real difference between sort of the drug discovery part of the business and the tools and diagnostics part of the business. And we made some really good investments there, both in the banking and the research side. So you can expect to see us continue to show strength there. So on the industrial side, we also -- cybersecurity, we hired a new analyst in that area. And we're seeing some real traction there. I think in payments and blockchain and those kinds of areas, you'll see us continue to look at that because we think that is a trend that is still reasonably early. And so -- and we think it will be disruptive for the next decade. So from an industry standpoint, those will be the areas I would highlight, though, I would say just about every industry we cover is undergoing some meaningful transformation, like, for example, what we talked about an energy transformation. That is a very meaningful change to a traditional business. And we've seen a lot of our competitors exit the energy research business. And instead, what we've said is that business is not going away, it's just going to change meaningfully over the next 10 years, and we need to be a strong voice in that. The initiations we had and the followership that we have in terms of investable ideas for companies and that's part of the reason why you see our cash brokerage business up meaningfully, right, because that ties much more to research calls. That's why you're seeing us make meaningful improvements in our algorithmic trading capability in part because there are very few people talking about energy transformation is a key theme. That's going to play out over the next 5 to 7 years. There's so many winners and losers in that space. So when we look to extend our capabilities, again, we generally start with research is the first place when we talk about it. The other thing, I would say, we're continuing to add an outsourced trading. We're continuing to see growth in Europe. Our European research product, which now dovetails with our trading product that we invested in a few -- about 18 months ago, those are really starting to show significant traction. Again, I think that Europe is probably 6 to 9 months behind the United States in terms of economic regrowth. So our view is that we'll see a pickup in European business, both in the trading side as well as in mid-market M&A where we have a footprint there. So I think you can see us lean in as Europe starts to come back online towards the back half of this year. There's a number of places where I think we can choose to lean in, but I want to be clear to everybody, these are really obvious adjacencies to core businesses we are in. And so when you read announcements that come for us about places we're making investments, we're attaching those teams and those individuals to trains that are already moving that -- where we have a high degree of confidence in our ability to capture both market share and margin. And so I hope that answers your question. It's maybe a little more lengthy than you asked for, but we are thinking about this 24 hours a day, 7 days a week.
Michael Brown: No, that was great. And Jeff, just one here, I'd love to hear a little bit more about the SPAC trading business. I think it's really impressive to hear that you're the industry leader there and the fact that you've been able to retain that position, just given a lot of the larger players have much higher volumes in this space. So I was just wondering if you could share a little bit about, without giving away the special sauce, what kind of has made Cowen such a force in the SPAC trading space? What are your capabilities that you can offer investors that others just haven't been able to meet?
Jeffrey Solomon: Well, I think, partially, we've been doing it longer than anybody else has. When no one cared about SPACs, we were trading 50% of the flow in that space. And now everybody cares about SPACs and you go to the market leader, we're the market leader. I think -- and I -- I have a lot of respect. I've been -- I've said publicly that I bought my first SPAC in 1996, no one cared about it until over 18 months ago in a meaningful way. We were great at it then. We're great at it now. And so just, look, anything else when a market explodes, if you have a pole position and you've got the right kind of connectivity with your existing clients, you can penetrate that. I also think it's -- I want to be clear, it is super integrated into our equity franchise and that's also something that's different, right? When we have built our equity franchise, we built it with this idea that there's collaboration and connectivity, and we bring people into the organization, who fundamentally are intellectually curious and want to be able to understand product and bring that product to their clients. We have a premium for cross-selling and introduction. We also have a team approach where -- when individuals on our sales team or sales trading team are introducing new products. There's a collaborative effort to that. So no one really has to worry about the contention that goes on inside sales forces all the time. As a result, Mike, it's made it really easy for us to recruit. I think if you're in the equities business, whether sales, sales trading or trading, you want to be a Cowen. And I think that's something maybe we don't talk enough about. It is a difficult market, and there's a lot of people out there in this business that are just not happy where they are. But when you look at the energy and the effort and the collaboration that goes on, we're taking meaningful share, but people want to -- at Cowen, want to be here because of the fact that we're winning and that momentum begets momentum. So I look at the SPAC effort we make as an extension of that or a representation of that, but it's part of a bigger haul that's really in a great position due to the efforts of many, many, many people.
Operator: I would now like to turn the call back to Jeffrey Solomon. Please proceed with any further remarks.
Jeffrey Solomon: Well, thank you, operator. Once again, I'd like to express my gratitude to everybody on our team here at Cowen. What you've done over the past year, certainly over the past quarter, is truly incredible. And I know there are days when it feels like you're working super hard and you're sitting by yourself, and we've talked about this. Today is a day that is the manifestation of those efforts. And I hope that everybody at Cowen takes an opportunity to read and digest the performance because we don't get here without the individual efforts and the collective efforts of all of you. You really do embrace our core values of vision, empathy, sustainability and tenacious teamwork. And without a belief in those values and the way that you show them every day, we certainly would not be able to put the numbers out that we put out for our shareholders. I'm looking forward to seeing more of you in person in the coming months as we figure out how we return to the office in a responsible way. It's been a long time since I've seen many of you face-to-face. And I think I've said to many of you, I can't wait for that. We're mindful of the fact though that our success is also dependent on all of our stakeholders, which include our clients and our shareholders as well as our team members, but also our families and our communities in which we live and work. And we recognize that doing well enables us to do good, and that is part of our ethos here at Cowen. And it's part of what motivates us every day. And so we're in a very fortunate position where we can share some of our success with the people and the communities that have helped to get us here. Thank you all for joining us, and we look forward to speaking with you again on our next call in July. Have a great day.
Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
