JMP Group Earnings Call Nuggets: Absolute Comp Expenses Outlook

JMP Group (NYSE:JMP) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Absolute Comp Expenses Outlook

Joel Jeffrey – KBW: Ray, I appreciate the comments you made about the comp ratio. Just wondering though in terms of a hiring and going forward how should we think about the absolute comp expenses? Is the first quarter’s numbers sort of indicative of how you are thinking about or should there be a sort of gradual build throughout the year?

Joseph A. Jolson – Chairman and CEO: I think Ray said in his remarks that we are currently estimating that the comp ratio will be 65% for the year that would include the investment spending that we referred to in terms of hiring some of the people in investment banking, sales and trading and the like ahead of the revenue that they would generate. So that’s included in budget that was included in the first quarter, but remember it’s mix driven, so when you have a quarter where we have a high amount of investment income that has the lowest comp ratio of the various revenue sources. And in the first quarter we actually had a decent amount of carried interest fees which have the highest ratio so they almost balanced each other out, but I think for your modeling purposes it’s probably reasonable to just assume 65%.

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Joel Jeffrey – KBW: And then I know you made some comments before in the press release that talked about sort of negligible share repurchase in the first quarter. I mean is that more due to what was going sort of other things going with the company or how should we think about the repurchase activity going forward?

Joseph A. Jolson – Chairman and CEO: We have every year in the first quarter there is not much of a window between when we report or file our K and then when we go into our blackout period in the middle of the last month of the quarter, so this year I think there was less than two weeks or something. So we have order in a 10b5 plan. So it’s a passive order but depends on the stock price, so once its entered it can’t be changed and so it has to be entered pretty much in the middle of December in other words. And so we didn’t buy a lot of stock in the first quarter because of that. I think this quarter-to-date we’ve bought over 400,000 shares…

Joel Jeffrey – KBW: Then just lastly I mean in terms of, I really appreciate the comments you’ve made about how you are thinking about growing the business. Just wondering though I mean with lot of other firms out there struggling could you just talk a little bit more about why you think recruiting and building organically presents a better opportunity than a potential acquisition?

Joseph A. Jolson – Chairman and CEO: We looked a lot of acquisitions and since we’ve been public and some before we went public. While we’ll continue to evaluate and look and you never know what can happen it just seems to be a bad bid for us and acquisitions given the expectations on the parts of the sellers and the willingness of other companies to pay a lot more money than we would pay for the same earnings or in some cases losses. So rather than continue to wait around for something to materialize we actually think that investing a much less amount of capital in our owned businesses can get us to a higher earnings level over the next three years. Than we could through acquisitions, so we are not talking about, remember we have pretty good level of profitability and a lot of that’s coming from investment income and so we are talking about spending roughly $0.20 a share this year and maybe next year, total reduces what we otherwise would have earned, but we’re not spending all of our earnings, we will still have close to a 15% operating margin and might be 13%, 14%, 15% still pretty healthy it would put us right at the top of the industry group. And like I said, we are sort of hiring people that we think will be highly accretive in year three that should be accretive in year two, but highly accretive in year three. Lot of M&A guys, it takes a year of this sometimes 18 months to close the first deals that they generate on your platform. So, there is a bit of a lag there, that just the nature of the business. On the sales trading side, there is less of lag, but there still little lag as they get acclimated to a new platform and get to understand the research product that we have and that type of thing.

Joel Jeffrey – KBW: Ray, I appreciate the comments you made about the comp ratio. Just wondering though in terms of a hiring and going forward how should we think about the absolute comp expenses? Is the first quarter’s numbers sort of indicative of how you are thinking about or should there be a sort of gradual build throughout the year?

Joseph A. Jolson – Chairman and CEO: I think Ray said in his remarks that we are currently estimating that the comp ratio will be 65% for the year that would include the investment spending that we referred to in terms of hiring some of the people in investment banking, sales and trading and the like ahead of the revenue that they would generate. So that’s included in budget that was included in the first quarter, but remember it’s mix driven, so when you have a quarter where we have a high amount of investment income that has the lowest comp ratio of the various revenue sources. And in the first quarter we actually had a decent amount of carried interest fees which have the highest ratio so they almost balanced each other out, but I think for your modeling purposes it’s probably reasonable to just assume 65%.

Joel Jeffrey – KBW: And then I know you made some comments before in the press release that talked about sort of negligible share repurchase in the first quarter. I mean is that more due to what was going sort of other things going with the company or how should we think about the repurchase activity going forward?

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Joseph A. Jolson – Chairman and CEO: We have every year in the first quarter there is not much of a window between when we report or file our K and then when we go into our blackout period in the middle of the last month of the quarter, so this year I think there was less than two weeks or something. So we have order in a 10b5 plan. So it’s a passive order but depends on the stock price, so once its entered it can’t be changed and so it has to be entered pretty much in the middle of December in other words. And so we didn’t buy a lot of stock in the first quarter because of that. I think this quarter-to-date we’ve bought over 400,000 shares.

Joel Jeffrey – KBW: Then just lastly I mean in terms of, I really appreciate the comments you’ve made about how you are thinking about growing the business. Just wondering though I mean with lot of other firms out there struggling could you just talk a little bit more about why you think recruiting and building organically presents a better opportunity than a potential acquisition?

Joseph A. Jolson – Chairman and CEO: We looked a lot of acquisitions and since we’ve been public and some before we went public. While we’ll continue to evaluate and look and you never know what can happen it just seems to be a bad bid for us and acquisitions given the expectations on the parts of the sellers and the willingness of other companies to pay a lot more money than we would pay for the same earnings or in some cases losses. So rather than continue to wait around for something to materialize we actually think that investing a much less amount of capital in our owned businesses can get us to a higher earnings level over the next three years. Than we could through acquisitions, so we are not talking about, remember we have pretty good level of profitability and a lot of that’s coming from investment income and so we are talking about spending roughly $0.20 a share this year and maybe next year, total reduces what we otherwise would have earned, but we’re not spending all of our earnings, we will still have close to a 15% operating margin and might be 13%, 14%, 15% still pretty healthy it would put us right at the top of the industry group. And like I said, we are sort of hiring people that we think will be highly accretive in year three that should be accretive in year two, but highly accretive in year three. Lot of M&A guys, it takes a year of this sometimes 18 months to close the first deals that they generate on your platform. So, there is a bit of a lag there, that just the nature of the business. On the sales trading side, there is less of lag, but there still little lag as they get acclimated to a new platform and get to understand the research product that we have and that type of thing.

Joel Jeffrey – KBW: Ray, I appreciate the comments you made about the comp ratio. Just wondering though in terms of a hiring and going forward how should we think about the absolute comp expenses? Is the first quarter’s numbers sort of indicative of how you are thinking about or should there be a sort of gradual build throughout the year?

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Joseph A. Jolson – Chairman and CEO: I think Ray said in his remarks that we are currently estimating that the comp ratio will be 65% for the year that would include the investment spending that we referred to in terms of hiring some of the people in investment banking, sales and trading and the like ahead of the revenue that they would generate. So that’s included in budget that was included in the first quarter, but remember it’s mix driven, so when you have a quarter where we have a high amount of investment income that has the lowest comp ratio of the various revenue sources. And in the first quarter we actually had a decent amount of carried interest fees which have the highest ratio so they almost balanced each other out, but I think for your modeling purposes it’s probably reasonable to just assume 65%.

Joel Jeffrey – KBW: And then I know you made some comments before in the press release that talked about sort of negligible share repurchase in the first quarter. I mean is that more due to what was going sort of other things going with the company or how should we think about the repurchase activity going forward?

Joseph A. Jolson – Chairman and CEO: We have every year in the first quarter there is not much of a window between when we report or file our K and then when we go into our blackout period in the middle of the last month of the quarter, so this year I think there was less than two weeks or something. So we have order in a 10b5 plan. So it’s a passive order but depends on the stock price, so once its entered it can’t be changed and so it has to be entered pretty much in the middle of December in other words. And so we didn’t buy a lot of stock in the first quarter because of that. I think this quarter-to-date we’ve bought over 400,000 shares.

Joel Jeffrey – KBW: Then just lastly I mean in terms of, I really appreciate the comments you’ve made about how you are thinking about growing the business. Just wondering though I mean with lot of other firms out there struggling could you just talk a little bit more about why you think recruiting and building organically presents a better opportunity than a potential acquisition?

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Joseph A. Jolson – Chairman and CEO: We looked a lot of acquisitions and since we’ve been public and some before we went public. While we’ll continue to evaluate and look and you never know what can happen it just seems to be a bad bid for us and acquisitions given the expectations on the parts of the sellers and the willingness of other companies to pay a lot more money than we would pay for the same earnings or in some cases losses. So rather than continue to wait around for something to materialize we actually think that investing a much less amount of capital in our owned businesses can get us to a higher earnings level over the next three years. Than we could through acquisitions, so we are not talking about, remember we have pretty good level of profitability and a lot of that’s coming from investment income and so we are talking about spending roughly $0.20 a share this year and maybe next year, total reduces what we otherwise would have earned, but we’re not spending all of our earnings, we will still have close to a 15% operating margin and might be 13%, 14%, 15% still pretty healthy it would put us right at the top of the industry group. And like I said, we are sort of hiring people that we think will be highly accretive in year three that should be accretive in year two, but highly accretive in year three. Lot of M&A guys, it takes a year of this sometimes 18 months to close the first deals that they generate on your platform. So, there is a bit of a lag there, that just the nature of the business. On the sales trading side, there is less of lag, but there still little lag as they get acclimated to a new platform and get to understand the research product that we have and that type of thing.

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