Piper Sandler Companies (PIPR) Earnings Call Transcript & Summary

Good morning, and welcome to the Piper Sandler Company's Second Quarter 2026 Earnings Conference Call. Today's call is being recorded and will include remarks by Piper Sandler management, followed by a question-and-answer session. I'll begin by turning the call over to Kate Winslow. Please go ahead.

Thank you, operator. Good morning, and thank you for joining the Piper Sandler Company's Second Quarter 2026 Earnings Conference Call. Hosting the call today are Chairman and CEO, Chad Abraham; our President, Deb Schoneman; and CFO, Kate Clune. Earlier this morning, we issued a press release announcing Piper Sandler's Second Quarter 2026 financial results, which is available on our website at pipersandler.com/earnings. Today's discussion of the results is complementary to the press release. A replay of this call will also be available at that same website later today. Before we begin, let me remind you that remarks made on today's call may contain forward-looking statements 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 reports on file with the SEC, which are available on our website at pipersandler.com and the SEC website at sec.gov. Today's discussion also includes statements regarding certain non-GAAP financial measures that management believes are meaningful when evaluating the company's performance. The non-GAAP measures should be considered in addition to and not a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is provided in our earnings release issued today. I will now turn the call over to Chad.

Thank you, Kate. Good morning, everyone. Thank you for joining us. We posted second quarter adjusted net revenues of $491 million, a 21.8% operating margin and adjusted EPS of $1.04, all up significantly compared to the prior year. This marks our 11th consecutive quarter of year-over-year revenue growth, a testament to the durability of our model. Corporate Investment Banking revenues were $312 million for the quarter, up 31% year-over-year, driven by robust advisory activity. Financial services and Healthcare remain our 2 largest franchises and both delivered impressive quarterly results. During the first half of 2026, Corporate Investment Banking revenues totaled $636 million, a 30% increase over last year and our strongest first half performance on record. Our growth was broad-based with nearly all of our sectors and products contributing. This momentum validates our strategy of combining deep sector expertise with a broad suite of products to serve our clients throughout their life cycles and through a wide range of market conditions. Advisory Services achieved record second quarter revenues of $274 million, up 34% over last year, marking our sixth consecutive quarter of year-over-year growth. We completed 83 advisory transactions, a 17% increase in volume and earned more larger fees. Performance was led by financial services with meaningful contributions from Healthcare and Services and Industrials. Within Financial Services, our depository practice remains a market leader. While large-scale M&A activity continued to be lacking, middle market volume improved. We ranked as the #1 adviser in U.S. bank M&A by both announced transaction count and deal value in the first half, reinforcing our position as the go-to partner for bank clients across the size spectrum. Our Insurance and Asset Management franchises also contributed to our success. Investments in these franchises over the past several years, combined with increased alignment with our broader private equity relationships have driven meaningful growth. We are also experiencing positive momentum within our Private Capital Advisory group, which recorded their best quarter on our platform, driven by the secondary business. By leveraging our sponsor relationships and sector expertise, we are well positioned to capture share in this high-growth space. Our market-leading position, deep sector coverage and extensive portfolio of solutions drove first half advisory revenues of $525 million, up 25% over last year. In addition to financial services, our Healthcare group contributed strong results, led by our Med-Tech team, which advised on several of the largest deals announced in the sector. Market conditions for Healthcare M&A are more constructive, and our role as the top adviser in Med-Tech M&A by deal count continues to be a key differentiator as companies prioritize portfolio optimization, growth and scale. Despite a -- environment for sponsor activity during the first half, our relative performance was strong. Advisory revenues from Private Equity clients grew 10% year-over-year, outperforming the broader U.S. private equity market. This resilience highlights the value of our coverage model. As we continue to prioritize our private equity partners, we recently transitioned 2 senior leaders from our Services and Industrials group to serve alongside our existing Head of Financial sponsors, where they will focus on our Private Equity advisory efforts. We remain committed to scaling this practice, and we are uniquely positioned to increase our share of transaction activity, including M&A, debt capital markets advisory, continuation vehicles and IPOs as market conditions improve and transaction volumes accelerate. Turning to corporate financing. Second quarter revenues were $38 million, up 10% year-over-year, but down from the very strong first quarter. We completed 28 financings, raising $13 billion for corporate clients, primarily in the Healthcare space. While corporate financing activity and our revenues fluctuate based on client and sector-specific dynamics as well as macroeconomic data, our first half performance reflects a strong underlying trend. Revenues of $111 million are up 65% year-over-year, driven by a 33% increase in book-run transactions and higher average fees. Shifting to talent. We finished the quarter with 193 investment banking managing directors, a 6% increase year-over-year. Since the beginning of 2026, we have added 12 new MDs through promotions and hiring. We remain focused on productivity by selectively adding top producers to offset retirements and the departure of less productive bankers in order to align the platform for long-term success. With that, I will turn the call over to Deb to discuss our Public Finance and Brokerage businesses.

Thanks, Chad. I'll begin with an update on our Public Finance business. We generated $50 million of municipal financing revenues, double our first quarter revenues, up 18% year-over-year and our strongest second quarter on record. We underwrote 141 municipal negotiated transactions, raising $5 billion of par value for our clients. This performance was attributable to the strength of our specialty business, particularly the special district and hospitality groups, which completed several large transactions. We have built a differentiated market-leading specialty franchise that combines our high-touch underwriting with superior distribution and trading capabilities, creating a compelling value proposition for both issuers and municipal investors. Our governmental business remained resilient during the quarter despite a year-over-year decline as market conditions were more accommodative during the second quarter of last year. Our performance for the first half of 2026 was strong on a relative and absolute basis. Municipal financing revenues increased 7% over last year, outpacing the 4% par value growth of the municipal negotiated market. As we look ahead, similar to last year, we anticipate that revenues for the third quarter will decline from the robust second quarter. Our equity brokerage business generated record second quarter revenues of $63 million, up 8% year-over-year. This result was driven by successful execution of our strategy and aided by a unique convergence of benchmark rebalancing events in June. Our trading capabilities enabled us to participate meaningfully in these events, which produced our 3 largest days in firm history as measured by notional volume. During the first half of 2026, equity brokerage revenues totaled $123 million, a 10% increase over the prior year, and we traded 6.6 billion shares, up 14%. This performance underscores the strength of our platform and the value we provide clients. Looking ahead, we expect the third quarter revenues will follow historical trends, which typically reflect a seasonal decline. Lastly, turning to fixed income. The market environment remained challenging this quarter as ongoing geopolitical events and interest rate uncertainty, combined with a flattening yield curve dampened client activity. Against this backdrop, we recorded revenues of $49 million, down sequentially and year-over-year. While bank restructuring activity provided a partial offset to lower trading volumes during the quarter, it declined from the robust levels during second quarter of last year. We remain focused on providing tailored advice-driven solutions to help clients navigate the uncertain environment. Partnering with our banking colleagues to provide balance sheet restructuring advice following strategic events remains a differentiator for us. As we look ahead, we expect third quarter revenues to be similar to the second quarter. Now I will turn the call over to Kate to review our financial results and provide an update on capital use.

Thanks, Deb. My comments will address our adjusted non-GAAP financial results, which should be considered in addition to and not a substitute for the corresponding GAAP financial measures. For the second quarter of 2026, we posted net revenues of $491 million, operating income of $107 million and an operating margin of 21.8%. Net income totaled $74 million and diluted EPS was $1.04. During the first half of 2026, net revenues totaled $961 million, operating income was $201 million, and our operating margin was 20.9%. We generated $146 million of net income and $2.04 of diluted EPS. Second quarter net revenues increased 5% sequentially and 21% year-over-year, fueled by activity across advisory services, municipal financing and equity brokerage. This momentum carried through the first half, where net revenues rose 22% over the prior year period. Corporate Investment Banking led this growth with advisory revenues increasing 25% year-over-year, accounting for 55% of total net revenues and corporate financing revenues rising 65%. In addition, our municipal financing and equity brokerage businesses reached new revenue highs for the half year period. Our strategy of sustaining revenue growth while yielding best-in-class profitability continues to play out. Operating income for the first half grew 42% over 2025, outpacing our 22% revenue growth and illustrating the inherent scalability of our model. Turning to expenses. We continue to exercise operating discipline. Our compensation ratio of 61.5% for both the second quarter and the first half of 2026 improved year-over-year, reflecting our commitment to balancing employee retention with strategic investment opportunities. Non-compensation expenses for the second quarter of 2026 were $82 million or 16.7% of net revenue. For the first half, non-compensation expenses totaled $168 million, up 8% year-over-year, primarily due to a litigation-related expense taken during the first quarter. Non-compensation costs represented 17.5% of net revenues, a 230 basis point improvement from the first half of last year, highlighting our success in driving leverage as our revenue base expands. Our effective tax rate was 30.5% for the quarter and 27.1% for the first half of this year. Year-to-date tax expense was reduced by $7 million of benefits related to the vesting of restricted stock awards. Excluding these benefits, our effective tax rate for the first half was 30.7%. Now finishing with capital. During the second quarter, we repurchased approximately 391,000 shares of our common stock for $31 million and paid an aggregate of $14 million to our shareholders through our quarterly cash dividend. For the first half of this year, we returned an aggregate of $215 million to shareholders. This includes $115 million in cash dividends or [ $1.625 ] per share and repurchases of approximately 1.3 million shares of our common stock for $101 million. These buybacks have more than offset the share count dilution from the 2026 annual grants, reinforcing our commitment to disciplined capital management. Lastly, I'm pleased to announce that effective today, the Board approved a quarterly cash dividend of $0.20 per share to be paid on September 11 to shareholders of record as of the close of business on August 28. To conclude, our performance reflects the successful execution of our long-term strategy. Regarding our outlook, we anticipate third quarter net revenues will be in line with the third quarter of 2025. We enter the remainder of this year with a healthy pipeline and active client engagement. With our differentiated platform and proven ability to execute, we are well positioned to drive continued long-term growth and value for our shareholders. With that, we can open up the call for questions.

[Operator Instructions] We'll go first to Devin Ryan with Citizens Bank.

This is Noah Katz on for Devin. So to start, I think maybe we should focus a little bit on the middle market more broadly. Advisory results were strong this quarter, but the middle market still appears to be developing gradually within sponsor activity. And are you seeing a more meaningful shift from dialogue and pitching? And does the current level of activity give you confidence that the middle market M&A can build from here? And what are your expectations on the second half of the year?

Yes. Obviously, we've seen sort of results all over the place from the peers. So I do think it matters and depends on kind of what sectors you look at. Obviously, our 2 biggest sectors are Financial Services and Healthcare. And in those 2 spaces, the middle markets have been pretty good, and we're outweighted in those 2 spaces. And so obviously, that's driving results. We did sort of say in the release that the sponsor business, it depends on what data source you look at. Is it down? Is it flat? Obviously, ours was up a little bit. So we do think we're gaining some share. But yes, there are still parts of the middle market in Consumer, parts of Industrial, others that are tougher. I still think it's a pretty good market. It's just not great and robust. But the pitch calendars, new mandates, things look pretty good for the back half. It will just depend on close rates. I do think across the industry, I've seen some data from various auctions where the close rates have been a little lower than in the past. So we'll have to see.

That's great. Okay. And then switching gears a little bit, focusing specifically on fixed income. If short-term rates were to move higher from here, how much is that changing activity levels? And how would you think about the potential impacts across fixed income brokerage and then the municipal underwriting business?

Yes. So I would say one of the things that is very important for depositories, which is about half of our fixed income business is very focused on that client set and the Fed funds to 5 years finally got into positive territory, which is good for banks. So if we see that turn around again, that's going to put some pressure on that segment of our client base for sure. I would say when you think about the municipal business, which was another part of your question and how rates ultimately impact that, of course, that we're looking out at longer-term rates, right? You think about all the way out to 30 years. So that's going to have less of an impact there. It's really what does that do to overall sentiment and where do rates go 10-year out to 30 year that's going to have a bigger impact on the municipal financing business. I don't know if I've answered all your questions there, if you have a follow-up.

We'll go next to James Yaro with Goldman Sachs.

Chad, the ECM business has -- your ECM business specifically has been somewhat volatile this year so far, notwithstanding a robust Healthcare ECM backdrop, which you're obviously highly exposed to. Could you just help us think through the ECM outlook for the business?

Yes, I would say that you actually probably got some of both. Q1 was sort of huge outperformance relative to the market. Q2 is now pretty obviously underperformance. I think for the first half, in total, it's pretty good. It's really hard to benchmark on the quarter. If we happen to have a high single-digit biotech fee come into a quarter out of a quarter, it can impact those numbers. I do think we feel pretty good about the back half because the lion's share of our ECM business is biotech, health care related. I think that backlog is good, where those indices and stocks is trading is good. And obviously, if we had a second half like we had first half, it would be in total, a pretty good ECM year. Some of the other spaces, we're a little underrepresented in some of the industrial, industrial tech, some of the aerospace, defense, where you've seen some ECM pockets. So I think you really got to look sector by sector. But in total for us, the majority of our ECM business is Healthcare and the part of health care related to biotech is quite healthy.

Excellent. You have continued to deliver robust cost discipline, which I would say is notably better than many of your peers, in particular, this quarter. Could you just update us on your approach to managing costs and maybe what's allowed you to offset some of the upward structural drivers of cost such as AI spend and data so effectively?

Yes. Maybe we'll split this up. I'll take, obviously, the biggest part of cost is comp. I think we've talked about this before. It really helps us to sort of have a pretty diversified business with depositories and energy, which are sometimes different cycles than tech and health care. Obviously, we're still a little underweight in tech. Parts of the tech and software market have been tough for people. So in total, our mix of industries and business and products has been quite good, which helps us on the comp rate. Plus we're just -- for many years, we run a very variable comp rate, which is it's pay for performance. Bankers that produce, get paid really well, don't have a ton of fixed contracts. And so you have the ups and downs with that, but that does allow you to manage that comp ratio more tightly.

I'll take the non-comp side, James. A couple of things. We had a little bit of pressure through 2025 with the double expense with the move from Minneapolis. So not having that bleed into 2026 has given us some natural offset. In addition to that, I think we have talked about some of the pressure we're seeing from the renewal of data contracts, et cetera. So I think it's really just about good hygiene on a day-to-day basis there. We've seen some upward pressure. We are going to continue to see some pressure while we are out of the window where we're paying double expense for Minnesota. This is the first quarter where we have a little bit of double expense for New York, and I expect that to trend a bit higher through the end of '26 and into '27. So I'd say we've got some upward pressure with occupancy expense with an offset from a one-time expense last year. And then on the data side, the tech side, the AI side, I think it's just about good hygiene, good control, good transparency internally in terms of how we're choosing to deploy those resources.