Piper Jaffray : Earnings Release

Piper Jaffray Companies Reports Fourth Quarter and Full Year 2018 Results

MINNEAPOLIS - February 1, 2019 - Piper Jaffray Companies (NYSE: PJC) today announced its results for the fourth quarter ended December 31, 2018.

"We finished the year strong driven by advisory services and a robust year for equity financing," said Chad R. Abraham, chief executive officer. "Our continued strong results have enabled us to return $118 million to our shareholders in 2018. We are pleased to announce our annual special dividend of $1.01 per share, which brings our total dividend for 2018 to $2.51 per share."

Fourth Quarter 2018 Results

Full Year 2018 Results

(Dollars in millions, except per share data)

Q4 2018

U.S. GAAPvs.Q3-18

vs.	Q4	vs.	vs.	vs.	vs.
Q4-17	2018	Q3-18	Q4-17	2017	2017

Adjusted (1)

U.S. GAAPAdjusted (1)

2018

2018

Net revenues

• $ 224.4 $

  • 3% -5%$

    223.1

    • 3% -5%$

      784.4

      -10%

      780.8

      Net income applicable to Piper Jaffray Companies

• $ 18.2

  • -17% N/M$ 29.9

    • 5% 8%$ 57.0

      N/M$ 93.7

      Earnings per diluted common share

• $ 1.21

• -15% N/M$ 1.99

• 7% 11%$ 3.72

N/M$ 6.13

-10% -14% -14%

(1) A non-U.S. GAAP ("non-GAAP") measure. For a detailed explanation of the adjustments made to the corresponding U.S. GAAP measures, see "Reconciliation of U.S. GAAP to Selected Summary Financial Information." We believe that presenting our results and measures on an adjusted basis in conjunction with U.S. GAAP measures provides the most meaningful basis for comparison of our operating results across periods.

N/M - Not meaningful

BUSINESS & FINANCIAL HIGHLIGHTS

• • Fourth quarter revenues of $224 million represent our strongest quarter of the year driven by several businesses.

  • • Advisory services and public finance capitalized on the momentum built throughout 2018 with fourth quarter revenues of $128 million and $28 million, respectively, both high points for the year.

  • • Equity sales and trading registered the strongest quarter of the year with revenues of $23 million.

• • Earnings per diluted common share of $1.21 and adjusted earnings per diluted common share of $1.99 for the quarter.

• • Full year 2018 revenues of $784 million represent our second strongest year on record.

  • • Sustained performance in advisory services with revenues near $400 million, representing 50% of total revenues.

  • • Equity financing revenues of $122 million with 77% of revenues attributable to bookrun deals represents one of our strongest years.

  • • Retained leadership in public finance underwriting the second most municipal negotiated issues in the country. We underwrote 436 issues with an aggregate par value of approximately $11.5 billion.

• • Full year 2018 earnings per diluted common share of $3.72 and adjusted earnings per diluted common share of $6.13, representing our second strongest year on record.

• • Meaningfully reduced risk in our fixed income business by decreasing inventories 55% during the year.

  TALENT

• • James Baker, a leader in our energy franchise, named as global co-head of investment banking and capital markets.

• • We grew our investment banking managing director headcount by 7% to 90 managing directors during the year. The additions were broad-based across industry groups.

• • Expanded our research coverage in biotechnology during the year by adding two senior analysts. We now have one of the broadest biopharma platforms on the street with six senior research analysts and the capacity to cover 125+ stocks.

  CAPITAL RETURNED

• • Declared a special cash dividend of $1.01 per share and a quarterly cash dividend of $0.375 per share both to be paid on March 15, 2019, to shareholders of record as of the close of business on February 25, 2019.

• • During the quarter, we repurchased approximately 572,000 shares of common stock, or $39.2 million, at an average price of $68.59 per share.

• • Returned an aggregate of $118.1 million to shareholders in 2018 through dividends and share repurchases.

SELECTED FINANCIAL DATA

U.S. GAAP Results and Commentary

We adopted new revenue recognition guidance effective as of January 1, 2018. As a result of adopting the new guidance, we now present client reimbursed deal expenses on a gross basis on the consolidated statements of operations, rather than the previous presentation of netting deal expenses within revenues. This change did not impact our pre-tax operating income, however the financial measures for the three and twelve months ended December 31, 2018 were impacted as follows:

• • Higher net revenues,

• • Decreased compensation ratio,

• • Higher non-compensation expenses,

• • Higher non-compensation ratio, and

• • Lower pre-tax operating margin.

The new guidance is applied prospectively in our consolidated financial statements from January 1, 2018 and reported financial information for historical comparable periods has not been revised.

The following summarizes our results on a U.S. GAAP basis:

Three Months Ended

Twelve Months Ended

(Dollars in thousands, except per share data)

Dec. 31, 2018

Sept. 30, 2018

Dec. 31, 2017

% Change vs.

Q3-18

Q4-17

Dec. 31, 2018

Dec. 31, 2017

% Change

Net revenues Compensation and benefits expenses Non-compensation expenses Pre-tax operating income/(loss)

• $ 224,371

  • $ 217,528

    • $ 236,082

      3% -5% $ 784,442 $ 874,923 -10%

• $ 142,952

  • $ 139,151

    • $ 179,474

      3% -20% $ 512,847 $ 617,635 -17%

• $ 49,474

  • $ 48,742

    • $ 46,371

      2% 7% $ 196,718 $ 286,611 -31%

• $ 31,945

  • $ 29,635

    • $ 10,237

    8% 212% $ 74,877

    • $ (29,323)N/M

      Net income/(loss) applicable to Piper Jaffray Companies

      Earnings/(loss) per diluted common share

• $ 18,184 $ 1.21

• $ 22,023 $ (46,074)

  -17% N/M

  $ 57,036

  • $ (61,939)

  N/M

• $ 1.43 $ (3.63)

  -15% N/M

  $

  3.72 $ (5.07)

  N/M

  Compensation ratio Non-compensation ratio Pre-tax operating margin

  63.7% 22.1% 14.2%

  • 64.0% 76.0%

    • 65.4% 70.6%

  • 22.4% 19.6%

• 25.1% 32.8%

  13.6%

  4.3%

• 9.5% -3.4%

N/M - Not meaningful

The compensation ratio of 63.7% in the fourth quarter of 2018 decreased compared to the sequential quarter primarily due to higher revenues. The compensation ratio in the current quarter and year declined compared to the respective prior year periods due to lower acquisition-related compensation, and the impact of presenting client reimbursed deal expenses on a gross basis, as required under the new accounting guidance. This change in accounting guidance resulted in a 180 bps and 210 bps decrease to the compensation ratio in the current quarter and year, respectively.

Non-compensation expenses of $49.5 million in the current quarter were consistent on a sequential basis and increased compared to the fourth quarter of 2017 primarily due to new accounting guidance requiring the gross presentation of client reimbursed deal expenses. Non-compensation expenses of $196.7 million in 2018 declined compared to the prior year which included a $114.4 million non-cash goodwill impairment charge associated with our asset management segment. This decline was offset in part by the impact of presenting deal-related expenses on a gross basis.

Net income of $18.2 million and earnings of $1.21 per diluted common share in the fourth quarter of 2018 declined compared to the sequential quarter despite higher revenues, due to increased income tax expense related to a deferred tax write-off in the United Kingdom. Our net loss in the fourth quarter of 2017 was attributed to remeasuring our deferred tax assets arising from the enactment of the Tax Cuts and Jobs Act. This resulted in a non-cash write-off of $54.2 million of our deferred tax assets. In 2018, net income of $57.0 million and earnings of $3.72 increased compared to the prior year which was adversely impacted by the $114.4 million non-cash goodwill impairment charge and the $54.2 million non-cash write-off related to the remeasurement of our deferred tax assets.

Non-GAAP Results and Commentary

Throughout the press release we present financial measures that are not prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP").

The non-GAAP financial measures include adjustments to exclude:

• (1) revenues and expenses related to noncontrolling interests,

• (2) amortization of intangible assets related to acquisitions,

• (3) compensation and non-compensation expenses from acquisition-related agreements,

• (4) goodwill impairment charges,

• (5) the impact from remeasuring deferred tax assets resulting from changes to the U.S. federal tax code,

• (6) the impact of a deferred tax valuation allowance, and

• (7) the impact of the annual special cash dividend paid in the first quarter of 2018 resulting in an undistributed loss on earnings per diluted common share.

Management believes that presenting results and measures on this adjusted basis alongside U.S. GAAP measures provides the most meaningful basis for comparison of its operating results across periods, and enhances the overall understanding of our current financial performance by excluding certain items that may not be indicative of our core operating results. The non-GAAP financial measures should be considered in addition to, not as a substitute for, measures of financial performance prepared in accordance with U.S. GAAP. For a detailed explanation of the adjustments made to the corresponding U.S. GAAP measures, see "Reconciliation of U.S. GAAP to Selected Summary Financial Information."

The following summarizes our results on an adjusted, non-GAAP basis:

Three Months Ended

Twelve Months Ended

(Dollars in thousands, except per share data)

Adjusted net revenues

Adjusted compensation and benefits expenses

Adjusted non-compensation expenses

Adjusted pre-tax operating income

Adjusted net income

Adjusted earnings per diluted common share

Dec. 31,	Sept. 30,	Dec. 31,	Dec. 31,
2018	2018	2017	Q3-18	Q4-17	2018
$ 223,107	$ 215,652	$ 235,643	3%	-5%	$ 780,821
$ 137,161	$ 133,237	$ 154,776	3%	-11%	$ 483,601
$ 44,327	$ 40,996	3%	11%	$ 180,748
$ 38,088	$ 39,871	6%
$ 28,566	$ 27,626	5%
7%

% Change vs.

Dec. 31,	%
2017	Change
$ 869,604	-10%
$ 562,636	-14%
$ 153,316	18%
2% $ 116,472	$ 153,652	-24%
8% $ 93,661	$ 108,902	-14%
-14%

• $ 45,489

• $ 40,457

• $ 29,934

  Adjusted compensation ratio Adjusted non-compensation ratio

  Adjusted pre-tax operating margin

• $ 1.99 61.5% 20.4% 18.1%

$

• 1.86 $ 1.80

  11% $

  • 6.13 $ 7.12

• 61.8% 65.7%

  • 61.9% 64.7%

• 20.6% 17.4%

  • 23.1% 17.6%

• 17.7% 16.9%

• 14.9% 17.7%

The adjusted compensation ratio of 61.5% for the current quarter was slightly lower compared to the sequential quarter due to higher adjusted net revenues. The adjusted compensation ratios for the fourth quarter and full year of 2018 were reduced by 170 bps and 210 bps, respectively, due to the impact of presenting client reimbursed deal expenses on a gross basis. In the fourth quarter of 2017, we recognized additional compensation expense resulting from a change in the retirement provisions of our performance share unit awards, which increased the adjusted compensation ratio for the three and twelve months ended December 31, 2017 by 200 bps and 50 bps, respectively.

Adjusted non-compensation expenses in the current quarter and year include deal-related expenses of $6.2 million and $25.1 million, respectively, a result of the change in accounting guidance requiring the gross presentation of client reimbursed deal expenses. Adjusted non-compensation expenses in 2018 also include $3.8 million of restructuring costs incurred primarily related to headcount reductions in our sales and trading and assets management businesses. Excluding these items, adjusted non-compensation expenses were $39.3 million for the current quarter and $151.9 million for the current year.

Adjusted net income of $29.9 million and adjusted earnings per share of $1.99 in the current quarter increased compared to the sequential quarter reflecting operating leverage driven by higher revenues. Adjusted net income and earnings in the current quarter increased compared to the fourth quarter of 2017 primarily due to the lower corporate federal tax rate. On a full year basis, adjusted net income of $93.7 million and adjusted earnings per share of $6.13 declined compared to the prior year primarily due to lower adjusted net revenues, offset in part by the lower corporate federal tax rate.

BUSINESS SEGMENT RESULTS

The firm has two reportable business segments: Capital Markets and Asset Management. Consolidated net revenues and expenses are fully allocated to these two segments.

U.S. GAAP Results and Commentary

Capital Markets

The following summarizes our Capital Markets business segment results on a U.S. GAAP basis:

Three Months Ended

Twelve Months Ended

(Dollars in thousands, except client transaction data)

Dec. 31,

2018

Net revenues Operating expenses Pre-tax operating income Pre-tax operating margin

$ 215,035

181,660

$ 33,375

15.5%

Sept. 30, 2018 $ 205,870 176,783 $ 29,087 14.1%Dec. 31, 2017 $ 224,389 213,637 $ 10,752 4.8%

% Change vs.

Q3-18

Q4-17

Dec. 31, 2018

Dec. 31, 2017

% Change

• 4% -4% $ 741,422

3% 15%

• -15% 663,684

• 210% $ 77,738

$ 822,435 -10% 738,339 -10% $ 84,096 -8%

10.5% 10.2%

Client transactions Advisory deals Completed (#)

52

45

45

Aggregate value (in billions)

$

10.3

$

8.5

$

6.5

Equity financing deals Bookrun (#)

Total (#)

Capital raised (in billions)

$

12 15 2.9

$

14 19 3.2

$

14 24 5.1

Municipal negotiated issues Total (#)

Par value (in billions)

$

132 3.4

116

• $ 4.1

$

188 4.6

16% 21% -14% -21% -9% 14% -17%

16% 58% -14% -38% -43% -30% -26%

$

170 163 4% 28.9 $ 34.3 -16%

$

58 85 16.1

$

54 7% 84 1% 17.1 -6%

$

436 11.5

$

622 -30% 15.3 -25%

Advisory services revenues of $128.1 million in the current quarter, up 13% sequentially and 15% over the year-ago period, represent the strongest quarter of 2018 driven by more completed engagements and broad-based contributions from our industry groups. Revenues in the quarter reflect strong relative performance in a market where the number of completed transactions was down. For the year, advisory services revenues of $394.1 million declined 11% from a record 2017. The number of completed transactions increased from the prior year, however revenues declined as 2017 was elevated by several large fees. Our advisory pipeline remains strong heading into 2019.

Equity financing revenues of $22.3 million decreased 31% and 22% compared to the sequential quarter and year-ago period, respectively, driven by fewer completed transactions. Market-wide activity in the quarter was down meaningfully driven by increased volatility and a sell-off in the equity markets. For the year, equity financing revenues of $122.2 million represent one of our strongest years in nearly a decade. We were bookrunner on 68% of our deals reflecting the strength of our franchise. Consistent with the market, our deal activity was concentrated in healthcare, our strongest industry sector.

Debt financing revenues of $27.8 million, up 33% compared to the third quarter of 2018, reflect the strongest quarter of the year as we executed on our pipeline and benefited from our diversified platform. Revenues in the current quarter were down 17% compared to the fourth quarter of 2017, and on a full year basis, debt financing revenues of $73.3 million declined 22% from the prior year. Municipal market issuance volumes in 2018 were down 24% compared to 2017 driven by an acceleration of financings in December 2017 before the federal tax law changes became effective in 2018. Our performance during the year has continued to build momentum from historically low levels in the start of 2018, albeit down from a robust 2017.

Equity institutional brokerage revenues of $22.5 million were up 27% compared to the sequential quarter driven by an increase in payments received for equity research, and higher commissions from client trading resulting from increased market volatility. Revenues for the year of $77.5 million declined 5% from 2017, though market volumes and volatility were up. Global market participants are shifting trade execution to low-touch providers and paying for research services separately, a result of the MiFID II regulation in the European Union that became effective at the beginning of the year. We believe this dynamic will continue to exacerbate the seasonality in our equity institutional brokerage revenues as we typically receive larger research payments in the fourth quarter.

Fixed income institutional brokerage revenues of $14.6 million were down 19% and 44% compared to the sequential quarter and year-ago period, respectively. In the fourth quarter of 2017, we recorded higher trading gains as we took advantage of trading opportunities in the municipal market created by volatility stemming from record new issuance volumes. Revenues of $67.6 million for the year declined 24% compared to 2017. Lower trading opportunities, muted client demand, and our meaningful exposure to municipals negatively impacted our results. In 2018, we focused on minimizing risk and reducing inventory levels throughout the year to coincide with the market opportunity and our return thresholds.

Operating expenses for the fourth quarter of 2018 were $181.7 million, up 3% compared to the third quarter of 2018 primarily due to higher compensation expenses arising from increased revenues. Operating expenses in the current quarter decreased 15% compared to the fourth quarter of 2017 primarily due to lower acquisition-related compensation expenses. Operating expenses of $663.7 million in 2018 decreased 10% compared to 2017 driven by lower compensation expenses arising from decreased revenues, offset in part by higher non-compensation expenses resulting from new accounting guidance requiring the gross presentation of client reimbursed deal expenses.

Segment pre-tax operating margin was 15.5% in the current quarter compared to 14.1% in the third quarter of 2018 and 4.8% in the year-ago period. Segment pre-tax operating margin improved on a sequential basis primarily due to higher revenues. Despite higher revenues compared to the year-ago period, segment pre-tax operating margin in the fourth quarter of 2017 was impacted by higher acquisition-related compensation and the recognition of additional compensation expense related to a change in the retirement provisions of our performance share units. Segment pre-tax operating margin of 10.5% in 2018 improved slightly compared to 10.2% in 2017.