Cowen Group, Inc. announced its operating results for the second quarter ended June 30.
2012 Second Quarter Highlights
-On April 5th, Cowen completed its acquisition of Algorithmic Trading Management ("ATM"), a provider of global, multi-asset class algorithmic execution trading models
-Broker-dealer segment revenues increased by 9 percent in the 2012 second quarter compared to the prior year period
-Investment banking revenues were $16.3 million, a $1.9 million increase from the prior year period. The increase was driven by our debt capital markets product, which generated $5.6 million in the current quarter compared to $1.8 million in the 2011 full-year
-Brokerage revenues were $24.6 million, flat compared to the 2011 second quarter
-Assets under management increased by $1.3 billion to $11.5 billion at July 1, compared to April 1, driven by inflows for our cash management product
-Excluding cash management, assets under management decreased by $183 million during the quarter
-The Company's non-compensation expenses in the 2012 second quarter decreased by $7.3 million compared to the prior year period, including a $1.8 million reduction in fixed expenses
-On August 2nd, Cowen's Board of Directors approved a $15 million increase in the Company's share repurchase program
All financial highlights are presented on an Economic Income basis.
"In the second quarter we made progress across our businesses, despite a challenging environment," said Peter Cohen, Chairman and Chief Executive Officer. "At Cowen and Company, we are beginning to see the diversity in revenues that we expected from recent investments. In investment banking and capital markets, we saw a significant increase in fees from our debt capital markets, we have maintained a lead position in the healthcare sector and we are seeing meaningful gains in the technology sector. In the equities division, revenue increases from our institutional options and electronic trading businesses helped to offset weakness in the cash equities business. At Ramius, assets under management grew by over $1 billion due to our cash management product and strategies across the platform performed reasonably well despite the environment."
2012 Second Quarter GAAP Financial Information and Select Balance Sheet Data
In a release on August 3, the Company noted that for the second quarter 2012, the Company reported a GAAP net loss of $(7.9) million, or $(0.07) per share, compared to GAAP net income of $20.0 million, or $0.26 per share, in the second quarter 2011. The year- over-year decrease in GAAP net income was primarily due to a $22.2 million bargain purchase gain related to the acquisition of LaBranche & Co and an $18.3 million deferred tax benefit associated with the Company's acquisition of a Luxembourg captive reinsurance company, both of which were recognized in the prior year period.
2012 Second Quarter Economic Income Review
Total Economic Income Revenue
Total Economic Income revenue for the second quarter 2012 was $66.2 million, a 20 percent decrease compared to $82.4 million in the second quarter 2011. The decrease in Economic Income revenue was primarily the result of a decrease in investment income, partially offset by an increase in investment banking fees.
Compensation and Benefits Expense
Second quarter 2012 compensation and benefits expense was $41.6 million, a 2 percent decrease compared to $42.4 million in the second quarter 2011. This decrease was primarily attributable to a decrease in variable compensation, partially offset by a $1.8 million increase in the amortization of deferred compensation and investments in new professionals. Average headcount in the second quarter 2012 decreased by 6 percent compared to the prior year period, but increased 5 percent compared to first quarter 2012 due to the Company's acquisition of ATM in April. Total headcount at the end of the second quarter was 601.
The compensation to Economic Income revenue ratio increased to 63 percent in the current quarter from 51 percent in the prior year period. Compensation and benefits expense for the second quarter 2012 and 2011 included $5.9 million and $4.6 million, respectively, in share-based compensation expense. Compensation and benefits expense excludes equity award expense related to the 2009 Cowen / Ramius business combination of $1.7 million and $1.8 million in the second quarter 2012 and 2011, respectively.
Compensation and benefits expense was 60 percent of Economic Income revenue in the second quarter 2012, excluding $1.4 million of expenses associated with activities for which the Company is reimbursed and $0.7 million of severance expense. Excluding these same two items, compensation and benefits expense was 49 percent and 56 percent of Economic Income revenue in the prior year period and first quarter 2012, respectively.
Fixed Non-Compensation Expenses
Fixed non-compensation expenses in the current quarter decreased by 7 percent to $24.5 million as compared to $26.3 million in the comparable prior year quarter. The decrease was primarily related to a decrease in service fees and occupancy and equipment expenses related to cost cutting efforts made in 2011 to reduce excess services and space.
Variable Non-Compensation Expenses
Variable non-compensation expenses were $7.1 million in the second quarter 2012, down 43 percent compared to $12.5 million in the second quarter 2011. The decrease was primarily due to $4.3 million in professional expenses associated with Company's acquisition of a Luxembourg captive reinsurance company and $1.6 million in marketing/syndication expenses associated with certain funds within our alternative investment management business incurred in the prior year period.
Alternative Investment Segment ("Ramius")
Assets Under Management
As of July 1, the Company had assets under management of $11.5 billion, a 13 percent increase compared to assets under management of $10.2 billion as of April 1. The $1,348 million increase in assets under management during the second quarter of 2012 included $1,376 million in net subscriptions and $(28) million of net negative performance.
The increase in assets under management was primarily attributable to our cash management product, which had a $1.5 billion net increase in assets during the period due to a single, large mandate.
Management fees were $14.6 million in the second quarter 2012, a decrease of 6 percent compared to the second quarter 2011. There was a decline in management fees attributable to our healthcare royalty funds due to an increase in committed capital, in the prior year quarter, that resulted in recognizing cumulative retrospective management fees. This decrease was partially offset by an increase in management fees relating to our Value and Opportunity funds, and to our Ramius Trading Strategies funds, as a result of launching the Ramius Trading Strategies Managed Futures Fund in the 2011 third quarter.
The average annualized management fee charged in the second quarter 2012 was 0.54 percent, as compared to 0.55 percent in the 2012 first quarter and 0.61 percent in the prior year period.
Incentive income decreased to $2.6 million in the second quarter 2012 from $5.7 million in the comparable prior year period. The decrease in incentive income was primarily related to a decrease in incentive fees earned on our real estate funds and Global Credit funds. These decreases were partially offset by an increase in incentive fees relating to the Value and Opportunity funds.
Investment income represents net revenues generated on our invested capital and includes interest and dividend income received or accrued as well as realized and unrealized gains/losses recognized during the period. Investment income decreased by $14.4 million to $8.3 million in the second quarter 2012 from $22.7 million in the prior year period. The decrease primarily resulted from the recognition in the prior year period of a deferred tax benefit of $18.3 million pursuant to the acquisition of a Luxembourg captive reinsurance company, which is reflected within investment income in our Economic Income financial presentation. There was also a decrease in performance for the equity the Company has invested in the Enterprise Fund LP of $4.6 million, which was primarily attributable to unrealized losses relating to certain Europe-based private investments held.
These decreases were partially offset by an increase in performance of the firm's directly traded capital, driven by increases in performance in certain investment strategies including our deep value and public equity strategies.
Broker-Dealer Segment ("Cowen and Company")
Brokerage revenue was $24.6 million in the second quarter 2012, flat compared to the second quarter 2011. This was primarily attributable to a decrease in U.S. equities commissions in the 2012 second quarter, offset by an increase in institutional options activity and revenues earned from ATM.
Investment banking revenue was $16.3 million in the second quarter 2012, an increase of $1.9 million, or 13 percent, compared to $14.3 million in the second quarter 2011. The increase in revenues was primarily due to an increase in debt capital markets activity.
-Public equity underwriting revenue was $5.6 million from eleven transactions in the second quarter 2012, as compared to $7.3 million from eight transactions in the comparable prior year period. Of these transactions, the Company completed four lead managed assignments in the second quarter 2012, compared to three in the prior year period.
-Debt capital markets revenue was $5.6 million in the second quarter 2012 from the completion of two transactions. No debt capital markets transactions were completed in the prior year period.
-Private placement and registered direct revenue was $3.3 million in the second quarter 2012, as compared to $1.3 million in the second quarter 2011. The Company completed three private transactions in the second quarter 2012 as compared to two private transactions in the prior year period.
-Strategic advisory revenue was $1.7 million in the second quarter 2012, as compared to $5.7 million in the second quarter 2011. The Company completed one strategic advisory transaction in second quarter 2012 as compared to three strategic advisory transactions in the prior year period.
Share Repurchase Program
Cowen announced that its Board of Directors approved an increase to the Company's share repurchase program that authorizes the Cowen to purchase up to an additional $15 million of Cowen's Class A common shares from time to time.
The $15 million increase is in addition to the Company's existing $20 million share repurchase program announced in July 2011, under which the Company has acquired 5.4 million shares for $15.9 million. Also, since the program was announced, the Company has acquired an additional 2.0 million shares as a result of net share settlement relating to the vesting of equity awards.
The program permits the Company to purchase shares from time to time through a variety of methods, including in the open market or through privately negotiated transactions, in accordance with applicable securities laws. It does not obligate the Company to make any purchases at any specific time or situation. The program may be suspended or discontinued at any time. As of June 30, Cowen had approximately 114.2 million Class A shares outstanding.
Cowen Group, Inc. is a diversified financial services firm and, together with its consolidated subsidiaries, provides alternative investment, investment banking, research, and sales and trading services through its two business segments: Ramius and its affiliates makes up the Company's alternative investment segment, while Cowen and Company is its broker-dealer segment.
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