Piper Jaffray Q2 Results Show Earnings Disappointment on Fixed Income Weakness

Net income at $7.4 million compared to $11.6 million in year-ago period

Piper Jaffray Companies announced net income of $7.4 million, or $0.36 per diluted common share, for the second quarter ended June 30, 2010, compared to net income of $11.6 million, or $0.59 per diluted common share, for the second quarter of 2009, according to a Wednesday, July 21, company release.

For the first quarter of 2010, net income was $0.5 million, or $0.03 per diluted common share. Second-quarter 2010 net revenues were $127.7 million, compared to $132.3 million in the year-ago period, and $109.6 million for the first quarter of 2010.

"We had mixed performance for the quarter," said Piper Jaffray Chairman and CEO Andrew Duff in the second-quarter 2010 earnings release. "We generated solid investment banking results attributable to equity financing and advisory fee revenues. These results were partially offset, however, by significantly lower fixed income revenues driven by very challenging trading conditions in the second quarter."

Duff noted that Piper Jaffray's backlogs continue to be healthy across equity, public finance, and M&A. "We need constructive capital markets to realize the revenue potential in these backlogs," he said.

After opening in the morning at $30.65, shares of Piper Jaffray (PJC) had fallen 4.86% to $30.65 in mid-afternoon trading.

For the quarter ended June 30, 2010, Piper Jaffray's asset management generated pre-tax operating income of $3.0 million, compared to a loss of $1.4 million in the second quarter of 2009, and operating income of $1.7 million in the first quarter of 2010. Net revenues were $15.7 million, compared to $3.4 million in the year-ago period and $9.2 million in the first quarter of 2010.

"The increased revenues were primarily attributable to a full quarter of results for Advisory Research," according to the company release.

Devin Ryan, an associate director of equity research at Sandler O'Neill + Partners, noted that Q2 was Piper Jaffray asset management's first full quarter with the advisory research platform that the company acquired earlier in the year.

"Revenues improved from last quarter as a result, and management was optimistic that the advisory research platform is moving back onto client buy lists from watch lists, which generally occurs after acquisitions," Ryan said.

As for the drop in net income, Ryan attributed it to the company's fixed income trading area.

"Fixed income trading and debt underwriting revenues were lighter than the prior-year period but partially offset by equity underwriting and advisory fee strength," he said. Fixed income trading was negatively impacted by a decline in client activity coupled with a very challenging market where valuations also deteriorated. Quarter to quarter, it was a pretty good investment banking quarter for Piper Jaffray, but the fixed income quarter wasn't as good."

Sandler O'Neill has a hold rating on PJC stock.

Jack W. Plunkett, CEO of Plunkett Research Ltd. said Piper Jaffray is struggling with the same problem affecting the entire ibank industry: investors sitting on the sidelines.

"Until investors, particularly institutions, have more confidence in the direction of equity markets, growth in profits will be hard to come by for some firms," Plunkett wrote in an email. "PJ did have good results in underwriting, which is a general trend at all ibanks as the market for new issues has found some new life. M&A advisory activity is also picking up."

Further, Plunkett said, Piper Jaffray appears to have made a promising acquisition in terms of Advisory Research, which brought their investment professionals count up to 42 in the asset management sector. "I expect this to have a long term positive effect on profits," he said.

Piper Jaffray reported that assets under management (AUM) were $11.8 billion, compared to $5.9 billion a year ago. The increase was attributable to the acquisition of Advisory Research. AUM was down $1.0 billion compared to the first quarter of 2010, which reflected the decline in equity prices during the quarter. Net asset client flows were essentially flat compared to the end of the sequential first quarter.

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