Q3 2020 Cowen Inc Earnings Call
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Good morning, Thank you for joining us to discuss cowens results for the third quarter of 2020 by.
By now you should have received a copy of the earnings release, which can be accessed at Investor day, Count one dot com.
Before we begin the company has asked me 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 FCC.
Cowen has no obligation to update the information presented on today's call.
Also on today's call our speakers will reference certain non-GAAP financial measures, which the company believes will provide useful information for investors.
Reconciliation of those measures to GAAP is consistent with the company's reconciliation as presented in todays earnings release.
Now I would like to turn the call over to Mr., Jeffrey Solomon Cowens Chair and Chief Executive Officer.
Thank you operator, good morning, everyone and welcome to Cowens third quarter 2020 earnings call.
As Jeff Solomon and joining me today on the call is our CFO Steve Lasota.
As a reminder, we make available a quarterly financial supplement in the Investor Relations section of our web site. We encourage you to review it in conjunction with our earnings release.
Today I am excited to talk about the tremendous results, we have put up in the third quarter and why we believe the earnings momentum that we've experienced over the past six months it's sustainable.
Then Steve will review the third quarter financial results and after that we will be happy to answer any of your questions.
For perspective, our operating economic operating income in the past two quarters combined is higher and any two full years in Cowen history, even before factoring in the unrealized gains on our nickel indefinitely.
In these last two quarters, we generated over $6 per share economic operating income, which demonstrates just how compelling cowens valuation is at the current trading multiple.
This success is a result of years of planning and dedication as we have built a focused innovative and resilient business through key strategic investments.
A recent performance is due largely to the strategy we put in place over the past few years following them entre simpler fewer deeper.
We have concentrated our efforts towards industry is undergoing disruption partnering with companies that are often the agents of that disruption as well as investors and ecosystems that are at the center of creating value through fundamental change we have built acquired or developed the right mix of products that meets the needs of those claims.
And in many cases have become essential to their success.
We have developed a culture focused on empathy tenacious teamwork both.
Both of which foster the kind of creative collaboration that drives valuable insights and product innovation.
And we believe that promoting this empathetic culture is essential to helping our clients outperform.
Our shared success is proof that we that it is indeed possible to do well by doing good.
And we know that every time, we serve our colleagues clients and communities, we're serving our shareholders as we work to deliver more consistent profitability and higher returns.
Let me provide you illustrates is that how we submit our entire platform to help these stakeholders win.
In the healthcare sector in particular, biotechnology tools and diagnostics Med Tech and digital health It is.
As a good example of how we can do well by serving the needs of the greater community.
2020 has highlighted the importance of therapeutic in vaccine development as getting the global economy back on track depends on the drug discovery ecosystem, We're Cowen has a leading position.
You should also know that the explosive growth in capital formation for life Sciences companies has led to the approval of over 400, new drugs over.
Over the past decade.
Improving or saving the lives of countless patients.
Today, there are over 500 publicly traded companies and biotech healthcare tools and diagnostics and we believe that we are still in the early early innings of this long term trend.
Over the past decade, there have been 400 ipos in the biotech sector alone and more than 1200 follow on offerings. This.
This is a robust addressable market repeat clients for Cowen and we believe we have capitalized on it ranking as a top book Green runner for biotech equity offerings.
We've also expanded our reach in equity capital markets fees in the broader healthcare sector as well ranking ahead of many banks far larger than Cowen.
In addition, we were ranked number two in terms of the number of deals we manage as many of you are aware health care is the biggest sector and nexium and the E C M fee pool.
Amounting to 40% of total assets total fees so far this year.
Cowen we had specific insights early in the past decade that moved us to invest heavily in life Sciences. Our success. This year not only reflects those strategic decisions, but our ability to attract world class talent to execute on those opportunities in this space and all of our businesses.
Another major investment theme beginning to accelerate its sustainability. It is driven by companies around the world adopting iasci standards, the investor community beginning to reach is finally, beginning to recognize the importance of these changes.
And the next generation of employees entering the workforce for whom sustainability is critical.
At talent, we are well positioned to take advantage of this long term trend because of our capital raising expertise and our understanding of the industry trajectory.
In the first nine months of the year, we executed 15 sustainability focus transactions alone.
Our belief in the positive long term trends for both health care and sustainability extend store investment management division as well, we have raised meaningful amounts of money in private equity structures in both industries over the past few years.
The actions of the federal reserve have forced investors into risk assets like equities were counting cells. While we believe the fed stance will continue to be accommodative for the foreseeable future regardless of the outcome of the election.
Our base case for post Kobe recovery looks more like a K W U or V, meaning that there will be winners and losers within each industry, making it more challenging for investors to outperform by simply tracking indices.
We are seeing increased interest in our research among active managers as they navigate the new opportunity sets emerging from the events of 2020.
As a result, our cutting edge collaborative industry and integrated Washington Policy research has become even more critical to our clients.
2020 has also been a period of heightened market volatility for years count has advocated for the importance of a non conflicted access to market liquidity and we.
We have built an independent industry, leading execution platform.
Our clients tell us that our technology and market structure insights are helping them to navigate the intricacies of the U.S. and European markets Mitch.
If it you had already made broker selection of premium game and 2020 has only accelerated that move we believe we are well positioned to continue to succeed.
In short our products and services have become more essential to our clients across banking markets and investment management, we're thrilled to be in a position, where we can help them to outperform now.
And for the foreseeable future.
And the success shows in our earnings for the third quarter was a powerful demonstration of the strength in staying power of our operating businesses with the second best quarterly result ever and economic operating income was more than 45% higher than the third most profitable quarter on record.
Which was the first quarter of 2015.
And this impressive performance comes even after putting aside the mark to market impact of nickel on our investment income.
Regarding our stake in nickel as you may recall this was a small investment in the vector accuse fact, which acquired the truck maker Nickel Corporation.
We intend to monetize and Nicolas stake when we are able to reasonably do so just as we have done with other post IPO investments in previous years, where we've had significant gains including till ray and long ago.
We highlight the impact of the Nicolas stake on our results because we don't want its performance to distract from the incredibly strong performance of our core operating businesses.
Now I will turn to those specific outcomes in our operating company segment now.
In investment banking, we had continued momentum with robust capital markets activity, particularly biotech tools and diagnostics, where we we also posted record M&A revenues for the quarter.
We managed to a total of 61 capital markets transactions during the quarter, including 18, Ipos and for debt transactions. It was our strongest quarter for debt capital markets since 2014.
The health care sector comprised 78% of banking revenues up from 72% in the prior quarter. We also had strong performance outside of healthcare completing 17 transactions in other sectors during the quarter.
M&A fees were 18% of total banking revenues.
Capital markets Advisory, which includes private placements pipes and private debt financings were up nearly 70% year over year and made up 16% of total banking revenue.
2020 has demonstrated that corporate financing decisions are actually strategic ones and we have a purpose built platform that incorporates indepth industry knowledge with world class execution capabilities.
And please note that our advisory revenues do not include contributions from our new team members joining us from MHP partners as that acquisition closed on October Onest.
This acquisition expense expands our coverage of the middle market sponsor universe and provides additional sector expertise.
Overall, we have had a stellar year in investment banking with revenues through September up 85%.
Versus the first nine months of 2019.
While the surgeon capital markets activity has benefited Cowen I'll reiterate that a lot of our success. This year comes down to the investments and strategic decisions. We've made over the past few years, such as building out our product offerings to complement our coverage teams, adding resources across sectors and acquire important to bolster our middle market M&A and private equity coverage capability.
Yes.
Our approach is to look horizontally to get beyond traditional industry classifications by developing capabilities in new growth areas that span multiple industries by building out domain knowledge and expertise, we can advise clients attempting to capitalize on the disruptive multiyear trends. These insights have informed our move to develop the cannabis banking practice law.
Before the rest of the street to create a leading sustainability franchise and embrace the important facts as a strategic alternative to more M&A and IPO pads.
Through September of this year, we ranked number eight across all industries in terms of ECM fees.
Which means we're punching well above our wafer from our size one key to the strength.
While less than 25% of the capital markets revenues is from Ipos more than 50% now comes from follow on offerings and we have a strong record of attracting repeat business year to date 2020, nearly 70% of the transactions, where we were a book runner are with existing talent clients.
Looking ahead to future looks bright for our banking franchise. The fourth quarter is off to a great start with October banking revenues, well above the third quarter monthly average and.
In addition, our deal backlog is at record highs as a reminder, that backlog does not include most follow on offerings as they are executed too quickly to enter the backlog.
In markets, we had our second strongest quarter on record, despite a 20% quarter over quarter decline in us trading volume.
Daily revenues were $2.6 million for trading day, just shy of the record set in the second quarter of nearly 2.7 million per day, we have built a powerful independent multi asset execution platform.
And our impressive growth in both revenues and profitability over the past year demonstrates our momentum.
We saw particularly strong performance by special situations Securities Finance Cross asset trading outsourced trading and prime brokerage.
Non U.S. execution has been a fantastic area for us with revenue growth exceeding our forecast by a long shot.
We are we continue to build out our team and we think we are there are ample opportunities for us to gain more market share.
Other highlights in the quarter included growth in stock trading, where we have an unrivaled industry, leading market share and onboarding of new clients on our swap trading desk.
In October you as trading volumes dropped approximately 10% from third quarter levels.
Cowen average daily revenues for the month or broadly in line with the change in market wide trading activity and our competitive position remains solid.
In research we continued our intense period of research production in client engagement holding 125 conference calls for clients, which attracted thousands of attendees more than 200 corporates participated in our virtual inventory during the quarter, including summits on communications infrastructure liquid biopsy in cannabis policy.
Our research team was prolific with total reports published in the third quarter up 12%. We published 10 of our marquee ahead of the curve series reports, including a deep dive uncoated vaccine in therapy development, a multi sector look at competition between us and China and exploration of the future of mobility. This.
This intense productivity yielded a year over year increase in institutional client votes, continuing our trend of double digit gains.
In investment management management fees are at the highest annual run rate in over four years.
While total assets under management are up $1 billion year over year to $11.8 billion.
Looking at our five investment strategies, our healthcare strategy ended the quarter with $807 million in assets under management, while incentive fees were negatively impact by mark to market valuations in several recent ipos in that strategy. The overall investment environment remains favorable for deploying capital.
Our sustainability strategy had $385 million in AUM at quarter end and during the third quarter. This strategy made its second investment a $150 million lead investment in pro Terra a leading us manufacturer of electric buses and commercial vehicle powertrain.
The merger our strategy has $413 million in AUM at quarter end.
And the strategy outperformed the benchmark HF Rx merger Arb index for the quarter.
The healthcare royalty strategy ended the quarter with $3.5 billion and total AUM and the strategy has committed over $700 million of capital year to date across a number of funds.
Our most recent main fund had a final closing in November of 2019 and is currently 40% committed.
The activist strategy had a 5.9 billion in assets at quarter end up from $5.8 billion in the prior quarter.
The strategy was modestly positive in the third quarter and year to date as strongly outperforming the benchmark Russell 2000 index.
Starboard value acquisition company, a spec successfully raised $360 million in September.
Finally, turning to our asset company, which as a reminder includes noncore investments that we intend to monetize.
The value of our stake in the Italian wireless company Lincoln was marked up by four and a half million dollars to $77.4 million as the company experienced an increase in demand for it services.
The net asset value of our LP investments information eight and eclipse funds rose $200000 to $39.1 million at the end of August, which dot com filed a confidential IPO registration.
As a reminder, wishes the largest portfolio investment information eight and as of the end of September. It represented just over half of our $32 million investment information eight.
And now I will turn the call over to Steve Lasota for a brief review of our financial results for the quarter Steve. Thanks.
Thanks, Jeff So the third quarter of 2020, GAAP revenue was up 54% year over year to $387.7 million from $252 million.
Reported GAAP net income attributable to common stockholders of $18.6 million up from GAAP net income of $2.1 million in the prior year period.
In the third quarter of 2020, GAAP compensation and benefit expenses were $153.4 million, an increase of 33.1 million from the prior year period GAAP expenses, excluding compensation DNA were 90.1 million for the third quarter DNA expense was $5.7 million.
Quarter operating general administrative and other expenses were $84.8 million, an increase of 900000 from the prior year period.
Third quarter income tax expense was $8.8 million compared to $1.4 million in the prior year period.
Now turning to our non-GAAP financial measures, which we refer to as economic income and economic operating income.
Please consult the earnings release, and our quarterly filing for a definition of these terms as well as an explanation about how the company uses this non-GAAP measure and how investors find this measure useful.
To provide more transparency, we now provide a reconciliation in our quarterly earnings release, showing the three categories of adjustments made to gap to arrive at economic income.
First through category management Reclassifications in on consolidation Reclassifications do not have any effect on economic income for the third quarter income statement.
Category income statement adjustment does impact economic income with most of the current impact coming from the exclusion of the taxes.
Limitations of these adjustments are available in the earnings release.
The remainder of my.
Remarks will be based on these non-GAAP financial measures.
Please note that we have adjusted prior year periods of economic income to certain previously recorded economic income revenue recognition timing differences.
Oh period adjustments reduced full year 2018, economic income revenue by approximately $3.4 million and full year 2019, economic income revenue by $4.9 million. All the adjustments have been applied to our quarterly financial supplement are no changes to any prior period GAAP financials.
As a reminder, cone is two reportable business segments Opco in asset go you Opco segment consists of common investment management investment banking markets in resort.
It goes segment consists of private investments and other legacy investment strategies as Jeff noted, we had our second best quarter, both overall and in the Opco segment.
Go had total revenues of $272.8 million economic income of $32.8 million and economic operating income of $38.5 million in the third quarter of 2020 asset go at economic income revenue of 1.5 million and an economic operating loss of $1 million in the quarter third quarter.
On an overall basis, we reported economic income of $31.8 million for the third quarter of 2000, twentys compared to income of $5 million in the prior year period.
Third quarter economic operating income was 37.4 million compared to income of 10.1 million in the prior year period.
Revenues increased 27% year over year to $274.3 million.
For the quarter investment banking revenue was up 167% year over year to $185.2 million.
Brokerage revenues were also very strong up 52% year over year to $167.1 million.
Andrew and fees for the quarter were $14.6 million compared to $10.9 million in the prior year period incentive income was a loss of $1.3 million in third quarter versus income of $14.4 million in the third quarter of 2019.
Investment income was a loss of $90.5 million versus income of $11.7 million in the prior year period.
Third quarter investment income includes a negative mark to market on our Nicolas stake of $96.6 million.
This in the past few quarters, our financial supplement now provides additional transparency into our investment banking revenues breaking out our capital markets revenues into on underwriting revenues and capital markets Advisory revenues.
Through our expenses.
Compensation and benefit expense for the quarter was $153.8 million compared to $122.6 million in the prior year period, our comp to revenue ratio declined year over year from 56.6% to 56.1% of economic income revenue.
In the third quarter of 2020, we rebirth $48.3 million in compensation expense accrued against the nickel or mark to market gains in the second quarter, we will continue to adjusted that accrual in future quarters as needed as we mark the investment the market until the investment gold we are targeting an overall annual comp to revenue ratio range of 56.
The 57% we've note that overall target range takes into account compensation accrued any nekoosa investment gains.
Fixed non comp expenses totaled $34.4 million in the third quarter down from $37.1 million in the prior year period. The decrease was due in part to decrease service fees in occupancy and equipment costs.
Double Noncomp expenses in the third quarter of 2020 were $37.7 million compared to $37.3 million in the third quarter of 2019, the modest increase was due to higher brokerage and trade execution costs from increased volumes, partially offset by lower travel entertainment and business development expenses.
Third quarter, depreciation and amortization expenses were $5.7 million compared to $5.1 million in third quarter of 2019.
Taking a look at our year to date 2020 result.
We have also been very strong with economic operating income of $197.2 million or $6.65 per common share.
Moving the impact of our nickel or investment year to date 2020, economic operating income was $180.3 million or $6, an eight cents per common share.
Turning to the balance sheet at quarter end, the company had invested capital in opco totaling $784.1 million.
That includes the nickel a position which was valued at $41.6 million at the end of September down from the prior quarter would go up significantly from our original cost basis of approximately $5 million.
In Africa, we have invested capital totaling $127.7 million at the end of September during two our equity common equity, which is stockholders equity was preferred equity was 800.
$809.9 million compared to $708.5 million as of December 30, Onest 2019.
Common book value per share, which is common equity divided by total shares outstanding rose 23% to $30.48.
The Thirtyth 2000, twentys compared to $24.77 as of December 31, 2019.
Tangible book value per share was 24.32 at quarter end up 30% from 18 goals and 72 cents at the end of 2019.
Return on common equity was 18.6% in the third quarter of 2020 up from 5.6% in the third quarter of 2019 above our long term target of mid teens annual our ROE see excluding the impact of nickel a return on common equity was 42.6% in Threeq you 20.
As we noted in the release this morning, our board of directors doubled our quarterly cash dividend to eight cents per common share up from four cents per share.
During the third quarter, we repurchased 1.14 million common shares for 18.9 million, including purchases executed according to our existing Tenbfive one plan at an average cost of $16.49 per share.
Mark the largest quarterly buyback in five years, we will look to make additional share repurchases on an opportunistic basis weighing the impact of buybacks on our available cash flow as well as through billing market and business conditions.
Even though we bought a significant amount of shares in the quarter in our basic share count is down the increase in the dilutive share count is due to the 40% increase in average stock price over the quarter with that I'll turn the call back over to Jeff.
Thanks, Steve as we have outlined talent is focused on promising areas of growth within sectors. We serve.
As a result, our company as one of the few true growth stories to be found in financial services. We believe the market has not yet caught up with this reality given the council trading below tangible book value at very attractive earnings multiples. This is why we were aggressive in repurchasing our shares in the third quarter and why our board has chosen to increase our dividend.
As we believe in the consistency of our earnings power and our ability to generate solid returns for our shareholders.
While the third quarter results are remarkable they are even more so considering that the bulk of the Cowen team continued to operate via remote work during the quarter.
While some of our team members, particularly in trading banking and research have returned to our offices more than 90% of our team is currently working outside of the office, while still maintaining exceptionally high levels of productivity.
The safety and well being of our teams and their families remains our top priority.
As we continue to monitor the rising cobot cases in a number of geographies, where we have a presence. However, we we are also optimistic about the pharmacological effects to manage cobot epidemic in the long term in a recent ahead of the curve series report.
Our research team said, they expect one or more vaccines to be granted emergency use authorization before year end with broader access for the general population likely in mid 2021. They also expect antibody therapies to play a major role in supplementing vaccines, we monitor the these developments daily and these insights inform our back.
For the office approach.
Even as we wait for more developments and work remotely we are taking conscious steps to nurse the culture at the heart of Cowen embodied in our core values of.
A vision empathy sustainability and tenacious teamwork we.
We hold weekly leadership round table Webinars attended by hundreds of Cowen employees and have started hot holding virtual hallways to encourage unstructured interactions among colleagues in different departments, who normally would work near each other.
Many of our groups have also had so have also held social or teambuilding events, either virtually or in person.
We are also furthering our efforts to make counts culture more inclusive last month I joined more than 1300, chief executives in signing the CEO action pledge committing to cultivating an open dialog on questions about inclusion and diversity, expanding our cross cultural awareness and unconscious bias training and engaging our board of.
Actors in the development of inclusion and diversity strategies.
While making this commitment is important we recognize that inclusion and diversity is key to our future success and that we still have a lot of work ahead of us.
Overall, we remain closely connected and cohesive as a firm and we are focused on serving our clients our colleagues in our communities.
And as we all look forward to a time when biomedical advances coupled with ongoing public health measures will allow us to gather again in person once again.
And with that I will open it up for questions operator.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound. Please stand by while we compile the culinary roster.
Our first question will come from semi Marty with Piper Sandler. Please go ahead.
Thanks, Good morning, guys I actually wanted to start with one here on on capital markets Advisory. How are you guys viewing that opportunity on the private side and talk about the growth strategy for that area, how big that segment get over the next couple of years.
Centenary wish to kind of grow organically or is there an opportunity to grow a little bit more quickly through kind of inorganic means as well.
Yes, so thanks to meet for that for the question and thanks for getting your note out early this morning appreciate that it is.
When I look at capital markets Advisory ITSM, it's really a function of.
What our clients want to do and increasingly we're being asked to take on private placements.
Private investments in public equities.
Those are really the biggest areas of growth I think we have to we've always chosen to be more selective in that area, meaning.
Meaning that those are generally speaking heavier lift and but bigger fees and so I think the constraints around the growth in that area is oftentimes around staffing as we see the demand increase and we are certainly as we look at.
At opportunities related to our spec business and our crossover business and we'll continue to step up in that area and I would expect that it's going to be up a bigger percentage of what we do.
Just as the ebb and flow of public markets, an IPO sort of happened. So I think you'll see quarters in which it becomes more meaningful and then quarters like this quarter, where the opportunities in the public markets.
Our our so overwhelming that we.
We are taking advantage of those and this is what I would say about all the things we're doing.
When we talk to clients, we are talking to clients around the full service of products that we can offer to meet their needs and so in many cases, we're walking in with a full suite of.
Of financing alternatives that match the strategic objectives of the company and so what what falls out of in our numbers is really where our clients want to go to access that capital and sometimes it makes more sense for them to choose the private markets where.
They can stay out of the public limelight for a while and develop their their strategies and sometimes it makes sense for them to be in the public markets and so we look at that and we feel equally comfortable being able to execute for clients in both but what you're seeing here is I think a function of a.
Of the product mix really driven by what our clients are looking to do at any given moment in time.
Okay, great. Thanks, just a follow up there on the public side.
Talking kind of non not biotech related banking areas like consumer and industrial technology. How are you guys feeling about the potential for growth in this environment, there you're seeing opportunities arise or is it kind of more cyclical for the business.
Yes, I mean, I think outside of healthcare were obviously, we're seeing more companies are accessing the public markets today, and whether that are accessing them through traditional ipos or frankly backend fast mergers, which has become an increasing part of certainly our businesses and an increasing part of the marketplace and so.
So.
Again health care has had an amazing run here this year and and we think thats sustainable over the long haul. We're also seeing meaningful growth in other areas in some of the industries that you mentioned because weve developed product capability, and obviously have research capabilities sales and trading capability in that area as well as banking capability and so.
To me the markets are open the fed has provided a backdrop, where really any company that wants to access capital. This year should be and and is doing it I think that extends well beyond the election is the fed will continue to be accommodative and that has enabled.
Really a lot of companies to get themselves well financed regardless of the outcome of the virus or one that actually begins to resolve itself and I think that that's one of the big lessons learned this year.
Is that this virus is going to resolve itself at some point, we are going to be any better position. We are every day.
Living with the virus and so the challenge for companies is to make sure that you have enough financing and until that demand comes back as you drive your top line revenues and and so for many of our clients. The goal is to get themselves well financed enough to get through that valley.
And as we start to see economic activity pick back up again in much the way we've seen it already a pick back up again in 2020.
Our companies are going to be well positioned our clients and be well positioned to take advantage of that.
Great. Thanks, and if I could just slip one more in here on capital priorities. It was nice to see that the increased.
Increased buyback in the quarter doubling of the dividend, but just wanted to think about the maybe the pace of the dividend increase going from here kind of whats the strategy and then.
Organic growth side I mean, how are conversations going are you looking for potential targets and how are you balancing kind of all those things.
Yes, it's been it's been a year with regenerated a lot of cash flow and I think if you look at the performance over the last few quarters and what we expect for the not too distant future.
So we feel very comfortable.
Increasing our dividend to the size I don't think we'll continue to increase at the same size.
All the time, but 18 not acknowledge the incredible progress that we've made building the equity in the firm to not acknowledge.
The amount of cash flow that we generated would be a mistake and our view is that we have an opportunity here to reward our shareholders both by increasing our stock buyback.
As well as providing a dividend yield and that in a zero interest rate environment can start to be very meaningful.
So going forward, we'll continue to look at using both levers as a way to return capital to shareholders. We are very focused on on on total shareholder return as the big metric that we want to make sure that we're driving.
And as our business continues to improve and we see continued growth.
And continued cash flow, we're going to continue to use both of those levers to to make sure that.
Our shareholders are getting the returns they deserve.
Okay, great. Thanks for taking the questions.
Okay.
Thank you. Our next question will come from Devin Ryan with JMP Securities. Please go ahead.
Great Good morning, guys.
Hi, Devin.
So first question here want to focus on.
Productivity and just looking at revenues at a firm level on a trailing 12 month basis, you're north of a billion dollars.
But actually even more interesting to me you're approaching $1 billion of production per employee, which I've always used.
As a benchmark for very successful firms in $1 billion, you can pay employees well you can invest for growth you can still deliver strong margins. So I think that's.
An impressive and I know the backdrop clearly has been good for business, but how do you guys think about benchmarking what an appropriate level of productivity is.
And really where I'm going with this is if we think about the framework and the model today.
And future growth.
How do you think about the ability to both expand headcount and what that could look like and also productivity is there room for more productivity from air in addition to expanding headcount and if there is where where's or more productivity opportunities.
Well, so I would say that that metric as well as an output greatest sort of looking at the scoreboard and I think it's a it's a valid metric when you're looking at how to value as compared to our competitors I think and so I don't minimize the importance of it I just don't think it's something we can manage to rate I think we have been.
And very tactical and making smart investments either organic or inorganic investments that drive our OE and and that's really been the primary metric that we've used which is over a business cycle, whether that's two or three years or in a year like this year. When you can have significant.
When you can garner significant share are you, making the right kind of investments in the teams to grab that share.
So when we think about hiring we're thinking about markets that are expanding where the total addressable market for our products and services is increasing or where we can take share from weaker competitors and so when you look at at the various places where we've made hires as obviously healthcare jumps off the page those or investments that we.
He began to make over a decade ago, because we had a fundamental belief in the growth of that space and we still think there's plenty of room to go on that and so I can certainly see us adding.
Capability in that area, most likely inorganically through through.
As the as the.
The industry continues to expand and and we leverage off of the success that we've had.
That's something I can certainly see us doing I think we highlighted sustainability is another growth area. We think has legs for the next several decades.
As we were starting to see those were investments, we started making two or three years ago.
And so going forward I can certainly see us adding capability now an area, though one of the things. That's interesting is if you think about sustainability.
Really.
Each of the industries. We cover is is actually going through their own sustainability upgrade. So we look at industrials and transportation and workforce automation in all these areas, where we're going to see meaningful investment and a big chunk of that investment is going to come from sustainable investing you know whether that agricultural investing.
Being or.
Ill or AG tech or any one of a number of these key themes and so we will continue to add people that drive that revenue because of their relationships on the last thing I would say is I think product capability is really important for us and and so on.
We've chosen in the stack business for example to be more of an exclusive player. In fact, it's not about the number of deals. We do it's about the quality of the deals that we do and the outcomes. We generate until I think we have been inundated with demand.
In that area as well as a number of other areas and so for US. The most critical thing. We can do is continue to hire high quality people, who fit our culture amazingly, who can be it get on the platform and really drive revenue.
Very quickly.
And if that means maintaining that we can continue to extend that million dollars a year per employee great. If it if it dips a little bit.
That could that could happen too, but again, our eyes are focused on the bottom line here and we have the opportunity to make the kind of investments we've made over the years I've seen it happen and come together in a year like this year gives us a lot of confidence in our ability to continue to invest.
Got it thanks.
Thanks very helpful color.
And maybe just to pick up on some of the points you just made there as you continue to diversify the investment banking graph, whether that be products like specs were account has a great footprint already youre or areas like sustainability as those continue to elevate the conversation are there any sectors that the firms not in right now where.
If they fit more with some of the the connectivity whether it be products worth seems like sustainability, just trying to think about how well.
Whether there is room for additional sector focus with some of these emerging trends in the market.
I would say we are looking at adjacent fees, that's actually a better way to think about it in our in our view so if.
If you look at adjacent fees you can see how biotech leads blends into tools and diagnostics blends into future health like that there. There are some nuances that if you're in this industry recognize the difference between those three categories, we tend to lump it altogether certainly.
So we look at adjacent sees in around health care health care impacts just about every industry also thats another theme that we've talked about.
I don't have anything specifically on sort of our agenda. This says hey, we're not in fill in the blank and we should go to go do that I think we've done a very good job at focusing and areas, where we have deep domain expertise and then figuring out where the activity is occurring in and around those those industries and I think.
So to that the necessary and essential ingredients to our success is seeing weathers industry disruption.
Seeing where the new company formation is actually occurring in who is likely to be a disruptor, bringing to bear both strategic and financing advice to actually deliver and it's it has helped us to compete very significantly against a firms both larger than us and smaller than us in a lot of our bigger company.
Competitors, our balance sheet dependent in terms of their ability to win business assets. That's been a strategy that for the last decade has worked really well for the big banks Thats not really available to us at Cowen. So we compete on intellectual capital and eliminate a number the smaller firms just don't have the breadth of capability that we have so they may have enough.
The expertise or relationships to EPS, but and they can go deep in one product area like M&A Advisory for example, but once it gets into marrying M&A advisory with a financing capability than then they get it then they get a little out away from their core competency and so the strategy for US has been to look for those industries.
Where there is disruption look for adjacent fees as those as those businesses grow organically make should we find the disruptive companies that are evolving in those industries in and bring to bear our industry expertise as well as our financing expertise to win business and that.
That takes time, so we've been talking Kevin for the better part of the last decade about the investments we've been making and there's just there's no short cut to bringing people onto that onto the platform and having them integrate them and what you're seeing this year. I think is the is the benefits of having made a number of those investments.
Over the course of the past half a decade or so and they are really starting to congeal as people are looking at ways to deliver for their client set that's what this is really about for us.
Okay. Thanks, Jeff Terrific and then just last quick one for me I think.
A big talking point through this earning season, it's just the efficiency. The companies are seeing through the pandemic here as everyone has gotten used to working.
Remotely, but also just the lack of travel and how.
Thats, allowing firms to do more.
Your bankers not being on airplanes half a week and actually spending in some cases more time or clients or.
Your executives spending more time with key clients because they could be in mortgage earnings and so I'm curious around kind of how that interplays with.
<unk> spending so the cost structure or kind of longer term. If there is any opportunities or if you think that some of this could be lasting to reduce non comp costs and then just if there is any view around that.
That kind of comment of.
These are world, where we all kind of become a little bit more productive because some of that traveled up wasn't necessary. Historically is replaced with more clients based on.
So I think there's definitely more efficiency I mean, you can be across time zones in a matter of seconds. As you migrate from one video call to the next and Thats something that I don't think any of us could have contemplated.
And being state relatively stationary allows you to stay focused on delivering for clients like.
I haven't really focused and my own personal EPS about how much time I spend in transit and how difficult. It is to focus on key elements, particularly when you're delivering for clients when you're moving from one place to another so I don't underestimate the power of that efficiency and its impact here I.
I do think though its important to over time for us to be back together again and I do expect that in the future. We will see travel pick up though I don't expect it to be quite at the same level that we saw I. Just think there is a fundamental shift in the part of both clients and our team internally here our colleagues.
At where.
Travel will be more because we want to travel not necessary because we have to travel and I think we'll go through a phase there where people are going to want to get out to see clients clients are going to want to see us we're going to want to see each other we have had a few.
Instances are opportunities over the course of the past quarter for some of our senior management to get around.
And see a couple of our.
Of our offices in different geographies, and there's nothing like being together.
So we did that in appropriate ways for social distancing and mask wearing and all the things to protect ourselves. We obviously, we've been doing testing when people are traveling to so we're being thoughtful about it but when you actually see people that you haven't seen for six months and you're in the same space with them there isn't electricity there that is not.
Replicable.
Remotely so I expect that we will see as we move into 2021.
So probably the back half of 2021 any meaningful amount you'll see in a pickup in things like in travel expense I think one of the things that I want to turn it over to Steve here in a second.
We've had tremendous productivity gains around that and one of the things with Cowen is because weve seen so much growth in our trading businesses. Our variable costs have continued to increase in an absolute sense and we are t. Any is also a variable expense. So the reductions in teeny have been offset by by two.
Manufacturing costs and when you look at it that's why we haven't seen a reduction in the variable expense line in any meaningful way and I think Steve can quantify that for you in a moment, but.
But when you look at that direct drive revenue gains associated with those transaction costs.
I would say we have a much better handle on our overall non comp to.
To revenue ratio and obviously, you've seen that come in significantly Steve maybe you can give a little bit of guidance on that just this quarter alone Devin.
Our community.
Klein Entertainment budget was down over $7 million from what we would have expected and what we budgeted for what that was obviously offset by.
Revenues in the markets businesses were so high that are.
Trading execution costs were up.
Offset but the savings in travel and entertainment.
Things like that but.
In budgeting for next year I would expect as Jeff was saying, maybe 25% will come back in the first half of the year and then maybe 50%, but we're working with we're working with others to determine how much. They think their teams will travel, but it's going to pick up but we don't expect it to be back to the levels that we were.
Our experience in the past for all the reasons you stated I mean, I don't think bankers are going to travel as much as they did in the past because they are efficient working either in the office so from home and not having they don't have to go visit everybody all the time.
Another big savings Devon, as we head into the first quarter next year, our biggest conference expense.
Converts expenses is a is a seasonal game and our biggest expense has happened in the first quarter because of the number of events. We have also our largest healthcare event happens and that happened. This year right. So when you look at the savings. We've had this year are the savings include having already spent in our biggest quarter there.
There were no non comp savings in the first quarter next year, when we get to the first quarter of next year and that quarter Rolls off you will see what the full year savings is because that's such a meaningful part of our conference spend.
In virtual conferences, obviously are a lot less expensive and the last thing I would say is it's not just banker travel.
It's analysts travel.
In and if you look at the efficiency from our analysts teams and I'm sure you're experiencing this yourself.
Virtual Andy ours.
Virtual try virtual corporate events are really can be really impactful in our.
A lot less expensive to do so there will be some I'd say long term.
Efficiency gains there that probably don't return to.
The costs don't return.
Yup.
Great well, thank you guys I'll leave it there.
Thanks, great. Thanks.
Thank you. Our next question will come from Steven Chubak with Wolfe Research. Please go ahead.
Hi, Good morning, Jeff Good morning, Steve.
Eight wondering hey, so I wanted to start off on the brokerage business. So now looking at how revenues are tracking relative to peers. You guys continue to see really nice momentum now can you remind us Jeff just what you believe is a sustainable run rate for that business and separately just recognizing institutional brokerage is going to be tethered to.
The operating environment other market indicators like volatility, but how should we be thinking about that services line, you've seen a nice step up there I'm trying to just gauge what the sustainability of that higher run rate is.
So a couple of things so what's driving the services line is certainly the growth in our prime brokerage businesses and the growth in our securities lending business. So.
Particularly the growth in things like outsourced trading.
In our securities lending and prime spaces, we continue to add capabilities on a selective basis like adults one book into swaps swaps capability for some of our clients. So that all those operate as we take share.
You know from from other competitors.
They operate independent from.
The market volumes business, I mean, theres somewhat market volume dependent but there are a lot less market volume dependent and there is room to grow thing one of the things that you've seen this year that also.
It's different than what people are.
Being in the rest of their businesses, we've grown organically.
Organically in Europe.
RPM growth trajectory has been pretty significant that team has been here for exactly one year.
And it shows that there is real share gains to be made in Europe with a very focused trading product and so one of the reasons why I think we're winning.
In in our business as opposed to silver other competitors is because clients want to have both the trading capability as well as the research sales capability. So there have been others of our competitors, who have really strong research franchises, whose equity businesses have not actually shown market share improvement or have declined in revenues and that's just a function of the fee.
Fact that you have to be in both sides of the business something we've been seeing for over eight years and so you have to make it really easy for clients to pay you I know you know this because you're in the business.
And so I would say we can continue to show share growth in those areas, but obviously, we're still volume dependent and the guidance that we gave or the the comment that we made here is that we expect to be a little bit more volume.
Tied to volume.
Certainly in this quarter, so far with the slowdown in October.
We're seeing our business slowdown in line with that.
But yet we still see our ability to garner market share and so I would expect that you will see just like in this in the third quarter. When we saw a 20% decline, we didnt decline and and so it gives us this buffer.
Buffering I'd say is probably the best way to say it.
It makes us a little less.
Dependent on purely tracking market volumes is that helpful.
That is helpful, but I know Jeff in the past you framed it as like a base level, either it's a $2.1 million of revenue per day I didn't know if that was something you guys were comfortable underwriting here.
Yes, I think we can we've been doing that pretty comfortably.
Okay fair enough and maybe just a follow up on the.
The expense discussion from earlier, but maybe just focusing a little bit more on the comp side you guys have done a really nice job as was noted earlier of staying disciplined on non comps and I'm. Just wondering how we should be thinking about the potential for comp leverage just given the strength of the revenue momentum that we're seeing I know that you guys have been hitting on your time.
Good so I'm just thinking over the long term is there room to deliver a more meaningful comp leverage, especially as some of these areas like SEC lending that should be higher incremental margin continue to scale.
I think we have actually stated pretty clearly where we think we are going to be in terms of comp I don't I think it's very important in years like this year that we.
Make sure that that.
That we deliver for our colleagues.
And we have the margins I mean, I think thats, a really critical thing as I mentioned earlier in the call we.
Comp to revenue ratio as an output.
It's an alpha revenue mix, it's an output of.
Profitability. Our view is we should make sure that we deliver for shareholders for for our clients and our colleagues and I think the when you look at where we are in the guidance that weve, given where we expect to land that allows us to do all of that.
And just one final one for me just on the election I was hoping to get some perspective on how you're thinking about the election impact and just implications from changes and the tax regime and any early signs you're seeing of just changes in potentially capital gains treatment driving some free.
Unloading of deal activity.
So I I near presuming there is a blue wave coming and I would say, we'll take a step back for a second and say regardless of what the election outcome is some.
Real underpinnings that will at night growth first of all the fed stays accommodative, regardless of who's in control.
Also think there'll be significant fiscal spending package that happens regardless of who's in control is the difference will be where the money is in the size of the money I think from a blue blue waves standpoint, if that actually occurs I think it's fantastic for the market to be clear.
Because there will be a much bigger spending package that occurs that will more than offset any drag from tax.
From a tax increase so people tend to pick and choose where they want to focus on a tax increase could.
Pair valuations or reverse some of the gains that we saw from the last tax cuts, but effective they're going to go back to where we were a few years ago. That's really what we're talking about here from a tax standpoint on capital gains at least anyway, and and I think that.
That will be more than offset by the amount of fiscal spend that's going to happen in areas like sustainability right and the interesting thing is.
No.
It's hard to say that we are seeing increased deal activity ahead of that I think the increased deal activity has been a function of the fact that every body has learned there.
They got a reprieve here from the fed lubricating the capital formation and enabling people to raise the money to do what they need to do in order to execute on the business long term regardless of the virus.
And you know we.
We said this over and over again within industries, they're going to be winners and losers. That's a big theme for us. So if you look historically what's happened is you know you could allocate based on what you thought about where that were tailwinds or headwinds in various businesses. That's the growth in passive investing is essentially that if you will the prolific.
Creation of a passive funds is what enables people to do tactical asset allocation based on relative weightings of how they feel about industries without picking winners and losers. The problem is you are seeing dispersion of returns now on that strategy and there are winners and losers within industries because people have been in position to garner market share.
And people have been out of position to garner market share and I think if you look at your own coverage universe, you'll see probably one of the widest dispersion of returns based on how People's business models look that's a fantastic outcome for us at Cowen for you at both people, who focus on funnel fundamental analysis and picking winners and losers and so.
Regardless of what the up.
Of what the outcome is of the election that probably persists and Thats. Our base case analysis and so I think we're we think regardless of whether or not a policy changes are our spring more activity.
I don't think EPS far enough to know that I just see this as a.
An opportunity a fundamental shift in the way that our clients are doing business and we're well positioned to handle it.
That's great job. Thanks, so much for taking my questions.
Thank you. Our next question will come from Michael Brown with KBW. Please go ahead.
Yes, Hi, good morning, Hey, Jeff.
So I wanted to most of my questions have been been asked and answered I guess I wanted to just start with the buybacks. Obviously you guys reacted. This quarter you were using a tenbfive one and you purchased this giant kind of $20 million of common stock.
Is that represent kind of your ceiling for for a quarter or just trying to think about it going forward.
Can start to monetize the Nicolas shares later this quarter and how you might deploy some excess cash and obviously you're throwing off a lot of cash from our operating businesses is that that's the right way to think about roughly what you can kind of do on a quarterly basis just kind.
Kind of help frame that for modeling thanks.
So I think first of all second question and obviously we had some.
Decent inside of how the quarter was shaping up so we had opportunities to buy the stuff cheap we were able to do that.
I thought you should also recognize that our board did authorize a replenishment of our stock buybacks. So were fresh up to the $25 million because we don't we bought so much stock back in last quarter. So that should give you an indication as to how opportunistic we will be.
We've spent for for the year about 25% of our cash flows and I think I've been very consistent.
As I said, we will buy back stock and return capital to shareholders based on our cash flow generation most of that cash flow generation. This year has come from operations and so I feel very comfortable continuing to maintain that pace as long as we continue to have the same kind of cash flow that we're generating from an operating standpoint, what we have.
No one time events like the sale of some of the assets and asset tow or the monetization of nickel, we'll take a look at that and there could be opportunities for us to do other things won't commit to it at this juncture, but I think we've already demonstrated in word and indeed that as we generate cash flow regardless of whether or not it's from operations are from onetime events that were going to do the right.
Turning to improved total shareholder return and if you go back a few years that was always a challenge with talent, which is how is the TSR going to work. We've so we had so much equity tied up in these illiquid assets that we weren't willing to.
To potentially leverage ourselves and put ourselves in harms way by getting ahead of ourselves on a cash flow standpoint, one of the things that's happened over the last few quarters is we generated more cash flow from operations in just the last two quarters than we would have had.
If we had liquidated the asset company at or close to the marks were in a very different position today and we still own those assets. So to me. It gives us a tremendous amount of flexibility to think about how we can reward shareholders in the future when those assets monetize.
And I think we've demonstrated over the last quarter and we'll continue to demonstrate our belief that when we are generating positive cash flow, we should be doing things with that to enhance total shareholder return.
Okay, great and thanks for the clarification on the secured.
Your buyback authorization.
Just one more for me I just wanted to follow up on that comp leverage question and yes.
Yeah, we look at the year to date performance revenues are up over 50% year over year, but your comp expense was up almost 50% as well and so.
Thanks urea that.
We certainly want to reward your your.
Alan current kind of producing strong revenue results, but it just seems to.
To me that you should probably be some better operating leverage against that and you talked about a little bit of the revenue mix, but can you just put a finer point on that just because it seems like you should be able to kind of run with a lower comp ratio given the results and sticking to 56 to 57 just seeing this.
A little bit high for a year and like Lincoln seen in 2020.
Yes, I would say it's been a remarkable year in a lot of ways and when you look at the are we use we're generating which are way in excess of our targeted returns to shareholders are going to get.
Our always way in excess of what they expected.
And when I look at all of our stakeholders, including our employees. The same kind of rules apply. This is the year that is an exceptional year in a lot of ways and you know, we certainly are delivering for shareholders in ways that they couldn't have imagined and we're driving margins and those margins are sustainable.
Even at these comp levels and so we're very comfortable with the guidance that we've given.
Because it makes sense to us in terms of the sustainability of our business just to be clear there will be other firms on the street that can't do this.
This year.
And when we're playing for the long game, we're doing the right things by the people who deliver for US every day every day.
And that without them, we don't get the kind of returns off the bottom.
That that shareholders are expecting or are receiving in a year like this year. So it's a balance is always a balance but when we sat down to talk about with our board and we sat down to talk about internally as a management team. This is the right place for us to be and so you know whatever the future holds the future holds but for right now.
The guidance that Weve, given makes a lot of sense everybody is winning.
Okay I appreciate the color. Thanks.
And speakers I'm showing no further questions in the queue. At this time I would now like to turn the call back over to Mr. Jeffrey Solomon for any further remarks.
Thank you operator in closing I do want to thank the team here at Cowen I feel like Thats sort of understating. The efforts that everyone has made.
You know not only.
Has our team demonstrated.
Continued commitment to our core values into our clients during this difficult time.
And I say this as some.
As clearly as I can it is an inspiration.
To be in the seat that come in and I get this it's an inspiration get from all of you.
[music].
When I see the efforts that people are making and the way they are extending themselves for one another.
And when I see the links to which people are going to deliver for clients. It makes me proud to be on the team here at Cowen and I'm proud to be in a position where.
Where I get to talk about it on calls like this and at the end of the day, it's been an amazing quarter from a financial standpoint, but none of that happens without.
The amazing activities of our team at Cowen and so I just want to be really clear when I say it on them on a public call like this how grateful we all are.
For those for.
For those activities and for that effort that everyone is making.
So with that I. Thank you all for joining us and I look forward to speaking with you on our next call have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.