Piper Sandler Companies - Q2 2023

Transcript

Operator (participant)

Good morning, welcome to the Piper Sandler Company conference call to discuss the financial results for the Q2 of 2023. During the question and answer session, securities industry professionals may ask questions of management. The company will make forward-looking statements on this call that are not historical or current facts, including statements about beliefs and expectations, and involve inherent risks and uncertainties.

Factors that could cause actual results to differ materially from those anticipated are identified in the company's earnings release and reports on file with the SEC, which are available on the company's website at www.pipersandler.com and on the SEC website at www.sec.gov. This call will also include statements regarding certain non-GAAP financial measures. The non-GAAP measures should be considered in addition to, and not a substitute for, measures of financial performance prepared in accordance with GAAP.

Please refer to the company's earnings release issued today for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure. The earnings release is available on the investor relations page of the company's website and at the SEC website. As a reminder, this call is being recorded. At this time, I would like to turn the call over to Mr. Chad Abraham. Mr. Abraham, you may begin your call.

Chad Abraham (CEO)

Good morning, everyone. Thanks for joining us today to talk about our Q2 results. I am here with Deb Schoneman, our President, and Tim Carter, our CFO. In a challenging Q2 of 2023, Piper Sandler generated adjusted net revenues of $277 million and adjusted EPS of $1.13. Activity across most of our businesses continued to be muted as a cloudy economic outlook has kept many clients and transactions on the sidelines, waiting for the inflection point to better market conditions. We remain focused on helping our clients navigate a highly dynamic economic landscape. When markets stabilize, we expect activity levels to accelerate, and we believe that we are strongly positioned to help our clients transact across our various product and business lines.

Turning to corporate investment banking, we generated revenues of $167 million during the Q2 of 2023, flat compared to the Q1. Highlighting the benefits of our diversified product and industry set, increased corporate financing activity offset a decline in advisory services revenues for the quarter. Specific to advisory services, revenues of $130 million for the quarter reflect the continuing challenges in the M&A and debt markets. We completed 61 advisory transactions during the quarter. Performance was led by our Healthcare group, with solid contributions from our Energy & Power and Restructuring teams. The decline in our advisory activity for the quarter was largely driven by a market-wide reduction in bank advisory transactions.

The outlook for bank M&A over the next six months remains challenging, negatively impacted by company and portfolio valuations, a lack of clarity around credit quality, and an uncertain regulatory capital framework. However, the longer-term outlook for consolidation and capital markets activity in the depository space is compelling, and our market-leading bank franchise is well positioned to advise clients when the market improves. Overall, our performance on a relative basis remains solid. Completed U.S. M&A market activity is down approximately 50% compared to the H1 of last year, while our revenues are down 29%. On a year-to-date basis, we maintained our ranking as the number two advisor on announced U.S. M&A transactions under $1 billion. Importantly, the outlook for M&A is improving.

We have a number of larger announced deals expected to close in the H2 of this year, as well as a strong pipeline of deals that have kicked off a sale process. We expect advisory services revenues for the H2 of 2023 to be better than the H1. Turning to corporate financing, the equity financing market improved during the Q2, with lower volatility levels and an increase in investor demand for new issuance. Activity continues to remain below historic levels. For context, 21 IPOs priced in the market during the Q2 of 2023, compared to an average of 102 IPOs per quarter for the last five years. We generated $37 million of corporate financing revenues during the Q2 of 2023, up on a sequential basis.

We completed 24 equity and debt financings, raising $5 billion in capital for corporate clients. Activity was driven by our market-leading healthcare franchise, which ran the books on all 14 deals completed during the quarter, including one of the largest biotech IPOs in history. Highlighting our strong relative performance, on a year-to-date basis, our economic fees from sub $5 billion market cap companies increased approximately 200%, compared to a 30% increase in the fee pool for this market. In addition, we ranked as a top 5 investment bank based on the number of book run deals for healthcare companies with less than $5 billion of market cap. As we look ahead, we expect financing activities to continue building as we progress through 2023.

Timothy R. Carter (CFO)

... Turning to investment banking managing director headcount. MD headcount remained flat sequentially, finishing the quarter at 171 managing directors. We added 2 MDs during the quarter, one to continue growing our real estate team and one to further expand our restructuring practice. These additions were offset by planned attrition. We remain focused on strategically managing headcount and driving productivity, while at the same time continuing to strengthen our sector coverage and product capabilities to ensure we have the resources to execute against market opportunity as conditions improve. With that, I will turn the call over to Deb to discuss our public finance and brokerage businesses.

Deb Schoneman (President)

Thanks, Chad. During the Q2 of 2023, our public finance business generated $17 million of municipal financing revenues, flat compared to the Q1. Market conditions remain challenging, with higher nominal rates, interest rate volatility, and weak investor demand. For the quarter, we underwrote 109 municipal negotiated transactions, raising $2.4 billion of par value for our clients. Our results continue to be disproportionately impacted relative to the overall market issuance due to our meaningful presence in the high yield sector and our middle market focus within the governmental business. As we look ahead, our pipeline is large and diverse. We have several significant high-quality transactions scheduled for the H2 of this year and a number of high yield issuers looking to raise capital.

As a result, we expect revenue generation to improve modestly during the second half of 2023, with additional upside if there is increased demand for the high yield offerings. Moving to our equity brokerage business, we generated $50 million of revenues for the Q2, down modestly from the Q1. Equity markets experienced lower volatility, which moderated volumes as well as our results. We traded 2.7 billion shares during the quarter on behalf of our clients, down 4% sequentially, relative to a 9% decline in market value. Client research votes and affirmation of the quality and capabilities of our platform continue to increase, and we see opportunity for further market share gains in this business over time.

With the expectation of reduced volatility in the near term, we expect our equity brokerage revenues in the H2 of 2023 to be consistent with the H1. Moving to fixed income, market conditions continue to be challenging. The yield curve inversion grew steeper during the quarter, keeping investors on the sidelines, awaiting more clarity on when the Fed will end its interest rate tightening. For the Q2 of 2023, we generated revenues of $37 million, down compared to the Q2. The breadth of our client relationships and product capabilities provided some level of resiliency to our results. Asset managers and public entity clients were active as they found relative value in the short end of the yield curve. Trading among our depository clients remained slow as they continued to focus on building liquidity and evaluating their capital and funding position.

Advising clients on hedging strategies drove an increase in derivative activity, and we remain active assisting clients with loan sales. While we expect the near-term outlook to remain challenging, we anticipate more clarity on interest rates as the year progresses, which should provide a turning point to more constructive fixed income markets. Like our investment banking group, we remain focused on broadening our fixed income platform. Our recruiting pipeline is active, and we see opportunities to continue expanding our market reach. We believe we are well positioned to gain share and assist clients when market conditions improve. Now, I will turn the call over to Tim to review our financial results and provide an update on capital use.

Timothy R. Carter (CFO)

Thanks, Deb. Before reviewing our non-GAAP financial results, let me highlight an item impacting our GAAP results this quarter. Consistent with all prior periods, our GAAP results include restructuring and integration costs related to acquisitions and/or headcount reductions. For the Q2 of 2023, our GAAP results include $4 million of restructuring expenses associated with headcount reductions, as well as vacated leased office space related to our previous acquisitions. Now, let me turn to our adjusted non-GAAP financial results, which should be considered in addition to, and not a substitute for, the corresponding GAAP financial measures. We generated net revenues of $277 million for the Q2 of 2023, down 4% from the sequential quarter and 20% from the Q2 of last year.

Consistent with the Q1 of this year, market conditions during the Q2 remained difficult for most of our businesses. Corporate investment banking revenues were flat on a sequential basis. Continued interest rate uncertainty has kept many of our fixed income and public finance clients on the sidelines. For the H1 of 2023, net revenues totaled $567 million, down 20% year-over-year. That said, our diversified platform is generating solid operating results. We continue to manage the business to reflect current market conditions while balancing our strategic objectives of growing the long-term earnings capacity of our platform. Turning to operating expenses and margin.

Our compensation ratio for the Q2 of 2023 was 63.8%, slightly higher compared to both the sequential quarter and the Q2 of last year, driven by lower net revenues. For the H1 of 2023, our compensation ratio was 63.6%. We continue to maintain our philosophy of managing compensation levels to be a balance of employee retention and investment opportunities, while delivering operating margins and shareholder returns. Based on our current outlook, we expect our compensation ratio to be around the year-to-date level for the remainder of the year. Non-compensation expenses for the Q2 of 2023, excluding reimbursed deal expenses, were $67 million, an increase of 12% on a sequential basis and 11% compared to the Q2 of last year, primarily due to the write-off of a receivable in our public finance business.

On a year-to-date basis, excluding reimbursed deal costs, non-compensation expenses totaled $126 million, or an average of $63 million per quarter. Looking ahead, we expect our non-compensation costs, excluding reimbursed deal expenses, to be around $62 million per quarter, in line with previous guidance. During the Q2 of 2023, we generated operating income of $26 million and an operating margin of 9.5%. For the H1 of 2023, operating income totaled $67 million and an operating margin of 11.9%. Our income tax rate was 18.2% for the Q2 of 2023, and 2.1% for the H1 of the year. Income tax expense for the year-to-date period was reduced by $15 million of tax benefits related to restricted stock vestings.

Excluding these benefits, our year-to-date tax rate was 25.3%. We expect our tax rate for the H2 of 2023 to be within our range of 27%-29%, excluding the impact from stock vestings. During the Q2 of 2023, we generated net income of $20 million and diluted EPS of $1.13. For the H1 of this year, net income totaled $63 million, and diluted EPS was $3.49. Let me finish with an update on capital allocation. We remain committed to returning capital to shareholders through market cycles. During the Q2 of 2023, we returned an aggregate of $16 million to shareholders, primarily through the quarterly dividend. For the H1, we returned an aggregate of $128 million to shareholders.

On a year-to-date basis, we repurchased approximately 447,000 shares of our common stock, or $64 million, which more than offset the share count dilution from this year's annual stock grants. We also paid an aggregate of $64 million, or $2.45 per share, to our shareholders through our quarterly and special cash dividends. Today, the board approved a quarterly cash dividend of $0.60 per share to be paid on 8th September 2023 to shareholders of record as of the close of business on 25th August 2023. Our Q2 and year-to-date results reflect the continued challenging market conditions, we've made significant strides over the last few years to increase the long-term earnings power of our platform.

Once markets open up, we believe we are in a position of strength to continue to realize the benefits of our expanded and diversified business. With that, we'll open up the call for questions.

Operator (participant)

Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, it was star one for any questions. Our first question comes from Devin Ryan with JMP Securities. Your line is open. Please go ahead.

Devin Ryan (Head of Financial Technology Research)

Hey, thanks. Good morning, everyone.

Timothy R. Carter (CFO)

Hi, Devin.

Devin Ryan (Head of Financial Technology Research)

Hey, I just want to start on the equity financing market. Obviously, saw some improving results there. I think healthcare just showed some strength, and that helped offset some of the softness in advisory. Just wanna maybe dig in a little bit around, you know, what you're seeing in the equity issuance environment, you know, whether you're seeing activity kind of building outside of just healthcare. Then, you know, the bigger picture is really, you know, you had a better quarter from the Q1, but you're kind of just back to the H2 of last year's levels and clearly far off of, you know, the 2021 record, which also wasn't normal.

Just trying to get a sense of, like, how you guys think about what a normalization in that business line could look like for Piper, especially since you've been adding resources and bankers.

Timothy R. Carter (CFO)

Yep. Yeah, I guess first of all, on the ECM question, yeah, it certainly continues to be better than the last few quarters. You know, the total overall fee pool in ECM is, you know, still down significantly from the averages from the last four or five years, but it's improving. I would say, you know, for us, it has been concentrated in healthcare, but, you know, we're slowly seeing some IPOs. You know, obviously, we were on a, you know, restaurant IPO. We did a couple of financial services deals, you know, secondaries. I would say it's we're usually concentrated more than half in healthcare. That's still the case. We're slowly seeing it branch out.

Expect it to continue to get, a little better, but it's not like it's fantastic levels of ECM at all. It's just, it's just better than how bad it's been. You know, relative to just overall revenue levels and, and, and where things are, you know, we've definitely in the last couple months, seen a, a pickup in our deal announcements, certainly our deal announcements, you know, with any size. We announced, you know, a couple of significant depository transactions this week.

Chad Abraham (CEO)

... and certainly, you know, every few days are seeing more announcements. You know, obviously, some of that'll trickle into Q3 and Q4, and so, you know, we, we made the comment that the advisory is definitely gonna be better in the H2. I would say, though, it's not, it's not like the COVID snapback in 2020. It, it, it feels like a recovery, a slow build. It's definitely getting better. We're definitely able to, to get some of the, you know, sponsor deals financed, but it's, you know, it's, it's slowly better. It's not, it's not racing back.

Devin Ryan (Head of Financial Technology Research)

Okay, terrific. Thanks, Chad. Then just a similar kind of framework for the advisory business. Appreciate some of the commentary. Sounds like some of the early indicators, of business there are improving. Love to just dig in a little bit around, you know, that, and if you can provide more perspective around either anecdotally or quantifying what you're seeing around some of these early indicators. You know, really, you know, is it a function of just deals that you've been mandated on, and maybe people are feeling like, let's, let's, you know, kind of start to move these forward at a faster pace? Or are you seeing kind of an uptick in, in new activity, coming in, or sponsors saying, "Okay, it's, it's now been quite some time since we've done something.

Markets are, are more interesting now, and so, maybe the risk isn't as extreme." Like, what, what is the, the tone? Then does the recovery, in your mind, is it uneven, where you have maybe the best assets trade and, you know, assets that are more cyclical or macro-centric just sit, and so it's, it's not a kind of a normal recovery in a sense of like everything, is improving at the same time?

Chad Abraham (CEO)

Yeah, I would just, you know, I would just say, you know, the signals for us is, is a bunch of the larger deal announcements and fees that we sort of announced the last couple months that haven't closed. Obviously, that gives us visibility into the H2. I would definitely say on our sponsor business, you know, anything of size, you know, that needed credit was very difficult. I wouldn't say it's great in the credit markets, but we're definitely getting financing packages. You know, some of those seller expectations are coming in line. With some financing package, some seller expectations coming in line, you know, we're able to get more transactions done.

You know, obviously, in some of our industry groups, you know, industrials and consumer and some of the ones that are heavy, sponsor-focused, you know, we've, we've launched quite a few deals in the last couple months, and, you know, those are 6-month processes, so we'll see what closes. What I would say is, you know, we're getting... you know, you get plenty of bids at the beginning, and, you know, at, at the end of the process, you know, there's not as many buyers standing as, as there certainly were a year or two. We're getting more and more of those over the finish line. I would say there is financing.

Then I would, I guess I would also add, certain sectors, you know, are obviously easier than easier than others in the sponsor space. Really across the board in industrials and healthcare and, and consumer and energy, you know, we're definitely seeing private equity get more active.

Devin Ryan (Head of Financial Technology Research)

Okay, got it. That's great. Just if I can sneak one more in here, for Tim, just on the, the write-off of the receivable. I'm assuming that's just a complete one-off here, with a one-off client. Just wanna make sure I understand that and make sure there's nothing else kind of to note there on the expense side. Thanks.

Timothy R. Carter (CFO)

Yeah. Yeah, Devin, you're thinking about that right. I mean, it's a, you know, a specific client who had a pretty unique situation. You know, we've determined we should, you know, we should write off that, that receivable, so we've fully written that off. There's no more exposure there.

Devin Ryan (Head of Financial Technology Research)

Okay, great. good stuff. All right, thank you. I'll leave it there. Thanks, guys.

Deb Schoneman (President)

Thanks, Devin.

Operator (participant)

Our next question comes from James Yarrow with Goldman Sachs. Your line is open, sir. Please go ahead.

James F. Yarrow (Managing Director and Equity Research)

Good morning, and thank you so much for taking my questions.

Deb Schoneman (President)

Morning.

Timothy R. Carter (CFO)

Hey, James.

James F. Yarrow (Managing Director and Equity Research)

Maybe we can start with the muni finance business. I, I appreciate your comments, Deb, but maybe just thinking about the longer-term trajectory of that business, what's the timeline over which you think the business fully normalizes? Then I guess with higher terminal rates, is there any reason to expect it can't fully return to the previous revenue run rate?

Deb Schoneman (President)

Yeah. First of all, just thinking about the path here, it's a little hard to predict exactly because one of the bigger drivers for us, for our business, is our specialty businesses, meaning the biggest driver of the improvement, and we need to see more inflows into high-yield funds. While that's stabilized this year, and there's been some modest inflows, it, you know, it's less than 10% of the outflows that we saw last year. That's something to watch, I guess I would say, as it relates to how soon the recovery comes in that business. I would say, relative to your comment on overall rates and where those are, the refinancing side of our public finance business, that obviously is impacted.

I would say, as we move forward, you know, you look back to the, you know, peak in 2021, that was, that was driving part of it. I would say we are focused on continuing to recruit and add to be able to build a business that's bigger than that. You're accurate in that interest rates will impact the ability to get back to that sort of level.

Chad Abraham (CEO)

Yeah, and I, and I would just add, I mean, the vast majority of projects, you know, we're financing are eventually gonna happen.

Deb Schoneman (President)

Yeah.

Chad Abraham (CEO)

Yeah, we, we will get back to the run rate. Some of the project finance, project development, real estate type stuff that you know, is specific to can you get it financed with that package? You know, that, that may be on the margin in a much higher rate environment, more difficult, but most of the rest of the public finance stuff or projects that are happening, I mean, they're, they're, they're eventually gonna happen.

James F. Yarrow (Managing Director and Equity Research)

Okay, that's really clear. Thank you for that. Chad, maybe I could just ask you about the competitive environment, for hiring. On the one hand, the bulge bracket's pulling back, and there have been some recent deals that have actually taken out some of the publicly traded independent peers, and I would suspect that means more capacity. Against that, a number or maybe all of your independent peers have talked about this being a, you know, a golden hiring opportunity. So how have these two things impacted the ability and cost of bringing in new hires today?

Chad Abraham (CEO)

Yeah, I, I would say, I mean, certainly for me, the last 4 or 5 months, we're, we're, we're spending more time than ever, talking to candidates. I, I think, you know, you just look, look across the board, the amount of successful platforms, you know, it's, it's a, it's a smaller number, so there's certain places, people wanna be. You know, the reality, though, is just because someone makes a move-- wants to make a move, doesn't mean it's necessarily a great hire. It's just a, a, you know, lot of scrutiny on quality, a lot of scrutiny on, in tough markets, you know, can people perform? You know, we really don't, we really don't want more bankers that are just, good in, great markets. We're definitely seeing more hiring.

I would say I mean, part of why it is, it is interesting is, you know, the packages, the, the way they're structured, you know, they're not as extreme as they've been, you know, in, in 2021 when things were great. You know, that, that does make it more interesting. But I would also say for us, you know, we're conscious of the fact that over the last few years, we've grown faster than most. You know, the reality is, we're still adding. We're gonna add at a measured pace, but it's not like, I mean, we don't need to add anybody to get significant uplift, 'cause, you know, productivity is at, you know, pretty low point, historically. I think we'll keep adding like we have at a, a pretty measured pace.

We'll also stay very focused on quality and productivity, and, you know, we'll continue to manage out, you know, underperformers or people that after a couple of tough years, you know, it's sort of obvious they're not hitting productivity.

James F. Yarrow (Managing Director and Equity Research)

That makes a lot of sense. Then just one more, which is sort of out of left field, but, you know, we, we just saw the Basel III endgame proposal for the big banks. There's clearly declining capacity for trading balance sheet across both the U.S. and Europe. I think the proposal yesterday for, for the U.S. was worse than expectations. You know, I, I guess, there are not that many independent full-service investment banks like your, like yourselves out there. When you think about the opportunity set, does, does this additional regulation at all change, your ability to take market share in some of your more balance sheet-intensive businesses?

Chad Abraham (CEO)

Yeah, I mean, I'll let Deb comment on the, you know, the, the, the fixed income side. I mean, obviously, relative to the regulatory side, you know, I said this on the call, last time. I think, you know, everybody was so excited with, you know, sort of what's happened, you know, was there gonna be a lot more consolidation in depositories? We sort of said that, yes, eventually that will happen, but, you know, it came to a screeching halt until people get some clarity. You know, this is the first week we announced a couple, you know, very significant transactions in the depository space. We, you know, we're definitely seeing activity pick up.

Obviously, there's a long close cycle on that, and, you know, whether that's a slow build or it, you know, starts to pick up and really accelerate at the beginning of next year, you know, what we do know is we're gonna be. You know, if, if it's difficult for everybody, you know, we're still gaining market share in depository, so eventually it's gonna be very good for us. I'll, I'll let Deb talk about, you know, some of the rules relative to balance sheet.

Deb Schoneman (President)

Yeah, and what I would say relative to the fixed income business, depositories are a large part of our business. It's actually the primary reason why we're seeing the softness in our fixed income results right now, because there's so, such a lack of clarity on interest rates, et cetera. As we think about our business, it- I would think about it much more as advisory in nature, working with banks across their asset and liability management. Right now, we're doing a lot of work with banks on helping them manage interest rates through our derivative product, creating liquidity by selling loans. It's not a, it's not a use our balance sheet to drive business. It's much different and much more advisory-based.

James F. Yarrow (Managing Director and Equity Research)

Okay, that's very clear. Thank you so much.

Deb Schoneman (President)

Thank you.

Operator (participant)

As a reminder, ladies and gentlemen, if you had a question, it is star one. We'll go next to Steven Chubak with Wolfe Research. Your line is open. Please go ahead.

Brendan O'Brien (SVP)

Good morning. This is Brendan O'Brien, filling in for Steven. I guess to start, I want to ask a bigger-picture question. You know, last year, you outlined a target of growing the Corporate Investment Banking business to over $2 billion. At the time, you obviously were not anticipating the slowdown that we have endured, but at the same time, these types of environments do tend to offer better opportunities to both recruit and acquire new talent and platforms. I was hoping you could discuss some of the areas that you are looking to invest in further to hit this target, and whether there's any interest in doing a more meaningful acquisition in the current market. Maybe you could speak to your confidence in being able to hit that $2 billion number, I believe it was by 2026.

Chad Abraham (CEO)

Yeah. What I would say is, I mean, you know, when we did that, we, we, we had, you know, a lot of analysis sort of by industry team on what the opportunity was. Frankly, even in our two biggest sectors in healthcare, you know, where we've always been traditionally really good in med tech and biotech, and we thought, you know, services could be a third leg on the stool. We've continued to invest there. Absolutely still believe that. Even in financial services, where it's a very significant business and, and in the middle market where, you know, the leader, there was a huge opportunity for us in terms of, you know, outside of depositories.

We've significantly done that, invested in our insurance business, asset management business, the real estate business, so, you know, we, we think that opportunity is significant. One of the biggest areas of opportunity was, you know, could we ever have a tech business that was the same size as financial services and healthcare? Obviously, we're undersized relative to some peers there, but that market certainly presents that opportunity, and we continue to invest in tech. Obviously, we did DBO. We talked about, you know, some of the products, you know, we, we weren't big in. Obviously, we did TRS in, in restructuring and, you know, frankly, that's gone incredibly well. Keeps growing and, you know, eventually we'll get to the size and scale where it, you know, becomes countercyclical to some of the advisory businesses.

Even our other teams, you know, there, there's lots of white space. I would say we still believe in that $2 billion banking target. It's still out there for us. You know, do I think it's gonna happen for 2026? Obviously, that depends on the recovery. When we talked about this, we sort of said, "You know, it doesn't really matter if it happens in five years, seven years, eight years, but getting that sort of continued growth path is important to us." I would say relative to other transactions, what definitely is happening in the marketplace, I mean, people have seen the success we had with Valence and Chemicals in the TRS team in restructuring, and obviously, what we did with Sandler and Simmons in energy.

Yeah, we're getting lots of good looks. I would say the bigger deals get tougher because we don't like to do a lot of transactions that have a lot of people overlap. The pace of things we're looking at and seeing, you know, is, is quite good. And, and I would also say we're starting to get to a zone where, you know, new boutiques or teams, you know, aren't talking about 2021 results. There's sort of being, you know, more realism on sort of the current market, and, you know, that'll help us get something executed.

Brendan O'Brien (SVP)

That's great color. Thank you. I guess switching pace here a bit, wanted to talk on the fixed income business. You know, took another step down this quarter, and it, it feels like it's been a story of one step forward and two steps back for the fixed income environment in general. However, in the past, you've talked about activity picking up once there's rate volatility, less rate volatility, and it does feel like we're closer to the end of this rate hike cycle. Just want to get a sense as to how we should be thinking about the outlook for this business from here. And Deb, I know you mentioned, like, the yield curve inversion, whether or not that needs to resolve itself before we, actually see activity pick up or, you know, if there's some other indicators we should be looking at.

Deb Schoneman (President)

Yes. I, I would agree that it feels like we're heading towards the end of that Fed rate cycle, and there's just still uncertainty around that, which is driving lack of activity. As I just mentioned, again, the primary driver of the challenges in the business have been within the depository space and their lack of activity. You can think about that in terms of when, when banks are able to get back in. In terms of your question on the yield curve, the inversion doesn't have to be reversed. It's just that we need to see that there's a belief that the Fed has ended, that rates are gonna start coming down, and that's gonna drive more investment out on the curve and longer duration.

It does- the inversion doesn't have to go away, but we need to feel like it's at the end, and it's gonna start moving the other way.

Chad Abraham (CEO)

Yeah, the one, and the one thing I would say, I mean, we obviously were asked about recruiting and investment banking. Since my time as CEO, as CEO, I, I haven't seen more opportunities-

Deb Schoneman (President)

Yes

Chad Abraham (CEO)

... you know, coming to us in fixed income, and I think because it's difficult. Most places, people know we have a pretty special platform, and I would say, you know, things like loan trading, you know, non-agency trading, things we're doing in credit unions. I mean, we've made some interesting additions and, you know, frankly, in the fixed income market, outside of some of the stuff we're doing in depositories, there's actually some areas of strength. We, we certainly acknowledge that we're, you know, this is a very difficult year. You know, obviously, 2021 was a very good year. We're still bullish on long-term opportunity, size of the market, our sort of position in that market, and, you know, again, are seeing some great opportunities to hire in fixed income.

Brendan O'Brien (SVP)

That's a great color. Thank you for taking my questions, guys.

Deb Schoneman (President)

Yeah, thanks.

Operator (participant)

We'll go next to Mike Grondahl with Northland Securities. Your line is open. Please go ahead.

Mike Grondahl (Research Analyst)

Hey, guys. Thanks. Hey, first question. I think I'm hearing advisories having a better H2, but not a blowout. Capital financing is also kind of continuing to improve and continuing to build. Am I right in thinking, hey, it's kind of steady recovery, slow to modest, but you're not seeing anything more than that at this point? Is that fair?

Chad Abraham (CEO)

Yeah, I think that's fair. I mean, I think, what we need to see, I mean, we certainly have the deals in the market. We, we need to see the close rate continue to improve in advisory. What I would say about the financing ECM business, you know, we've sort of been at this steady, you know, okay, for three quarters. Obviously, in Q3, you know, we always have August, which is lighter. Then, you know, when we pick up in September, you know, you sort of lose the, the first week with Labor Day. For us, the financing markets, it's fine. We're doing business again. You know, the whole H1 of last year, you know, it was, it was, shut down. You know, the question about, is it broadening to consumer?

Where we really haven't seen is a sort of a broadening to tech. you know, now there's a few interesting tech IPOs. you know, that I think that'll come to market towards the end of the back half. That'll, that'll certainly help the tech market. I think you characterized that right. We're, we're definitely seeing an improvement. We're definitely gaining confidence on sort of revenue improvement, but it's, it's not a snapback like we saw in 2020. It's a slow recovery.

Mike Grondahl (Research Analyst)

Got it. My 2nd question was just, you know, which sectors are sort of facing the greatest challenges for you? I think you kind of answered that with tech, you know, maybe slowest to recover. Any others that stick out?

Chad Abraham (CEO)

Yeah, I would say that the two toughest by far is in financial services depositories. I mean, we were down significantly in Q2 in depositories, even from end of last year and the beginning of this year. Then, yeah, relative to tech, we haven't seen, you know, much ECM activity in a long time, and, you know, that's a big business for us. Frankly, the M&A transactions in tech have been more difficult. Now, you've seen a big rebound in some of the software multiples and valuations, so you know, that will work itself out. If I would have to pick two of our most difficult teams, it would be the depository half of financials and tech in general.

Mike Grondahl (Research Analyst)

Got it. maybe lastly, Chad and Tim, how are you guys feeling about the cost structure today?

Chad Abraham (CEO)

Yeah, I mean, what, what I, what I would say about the cost structure is, I think we're watching it very carefully. You know, we did take a charge. We did some small headcount reductions, you know, in certain areas where, you know, where, where we're not seeing that rebound. You know, the reality, though, is we still have what I would say is a couple hundred employees, more than we had at, you know, the 2020 level. Frankly, non-comps are higher now than what they were back then. I think it's something we're watching very carefully, being very, very careful about new hires, obviously watching attrition, obviously managing out underperformance and productivity of, of, of some of our producers.

I think we'll, we'll continue to watch that, and, and, and be very careful there because, you know, if we're only getting marginal revenue improvement the next two quarters, you know, we're, we're gonna wanna get more leverage on the bottom line.

Mike Grondahl (Research Analyst)

Fair enough, guys. Thank you.

Operator (participant)

Thank you. With no other questions holding, I'll turn the conference back to Mr. Abraham for any additional or closing comments.

Chad Abraham (CEO)

Okay, thank you, operator, and everyone that joined. We look forward to updating you on our Q3 results. Have a great day and weekend.

Operator (participant)

Ladies and gentlemen, that will conclude today's conference. We thank you for your participation. You may disconnect at this time.