Earnings call: Canaccord Genuity posts robust Q1 with revenue surge

Canaccord Genuity Group Inc. (CF.TO) has announced a significant increase in its fiscal 2025 first-quarter earnings, with firm-wide revenue jumping 25% year-over-year to $429 million. The capital markets division experienced a notable 41% revenue increase, reaching $206 million, while the wealth management business saw a 13% rise to $216 million.

The company’s client assets hit a new high of $106 billion, with substantial growth across North America, Australia, and the UK & Crown Dependencies. Additionally, Canaccord Genuity declared a dividend of $0.085 per common share.

Key Takeaways

• Canaccord Genuity Group Inc. reported a 25% increase in firm-wide revenue year-over-year.
• The capital markets division’s revenue rose by 41%, while the wealth management business grew by 13%.
• Client assets reached a record $106 billion, with growth in key regions.
• The company announced a dividend of $0.085 per common share.
• Elevated costs were attributed to investments in growth and compliance infrastructure.
• There’s a positive outlook on corporate finance and M&A activities, despite acknowledging current challenges.

Company Outlook

• Canaccord Genuity is optimistic about future corporate finance and M&A activities.
• The company is witnessing a shift towards mid-cap and smaller-cap sectors.
• Investments in growth and projects are underway to support net new asset growth in wealth management.
• Better visibility into wealth businesses is expected in the next quarter.
• The annual general meeting is scheduled for today, with the Boston Growth Conference following next week.

Bearish Highlights

• The company noted flat asset growth in the Canadian wealth business.
• There were no significant new asset inflows or recruitment reported.
• Ongoing volatility in the U.S. capital markets business was acknowledged.
• Elevated costs in the wealth management division were due to investments in compliance infrastructure.

Bullish Highlights

• Strong performance in the capital markets division was driven by higher corporate financing and advisory revenues.
• Interest income from client cash and margin loans bolstered revenue in the Canadian and U.K. wealth businesses.
• The company has not experienced any departures on the Canadian wealth side, indicating stability in its workforce.

Misses

• The company is not seeing a strong IPO market currently.
• Difficulty in predicting new issue revenue in the current quarter was mentioned.

Q&A Highlights

• The company discussed its engagement with U.S. regulators regarding provisions for the U.S. trading operation.
• There was an acknowledgment of increased compensation costs in the U.K. division due to stock-based compensation and team acquisitions.
• Canaccord Genuity expressed confidence in the long-term profitability of their U.S. capital markets business despite current volatility.

In conclusion, Canaccord Genuity Group Inc. has reported a strong start to fiscal 2025 with increased revenues across its divisions, a record level of client assets, and a positive dividend announcement. The company faces some challenges but remains optimistic about its growth prospects and future activities. With strategic investments in growth and compliance, Canaccord Genuity is positioning itself for sustained success in the dynamic financial markets.

Full transcript – None (CCORF) Q1 2025:

Operator: Good morning ladies and gentlemen. Thank you for standing by. I’d like to welcome everyone to the Canaccord Genuity Group Inc. Fiscal 2025 First Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference call is being broadcast live, online, and recorded. I would now like to turn the conference call over to Mr. Dan Daviau, President and CEO. Please go ahead, Mr. Daviau.

Dan Daviau: Thank you, operator, and thanks for everyone joining us for today’s call. As always, I’m joined by Don MacFayden, our Chief Financial Officer. Today’s remarks are complementary to our earnings release, MD&A and supplemental financials, copies of which have been made available for download on SEDAR+ and on the Investor Relations section of our website at cgf.com. Within our update, certain reported information has been adjusted to exclude significant items to provide a transparent and comparative view of our operating performance. These adjusted items are non-IFRS financial measures. Please refer to our notice regarding forward-looking statements and the description of non-IFRS financial measures that appear in our Investor Presentation and in our MD&A. And now with that, let’s discuss our first quarter fiscal 2025 results. Results for our first fiscal quarter reflect improving market conditions for corporate financing and advisory activities in our capital markets division, coupled with continued strong performance from each of our wealth management businesses. Firm-wide revenue for the three-month period improved by 25% year-over-year and 5% sequentially to $429 million. This reflects a 41% year-over-year increase in revenue from our capital markets division to $206 million and a 13% increase from our wealth management business to $216 million. Excluding significant items, firm-wide pre-tax net income improved by 6% year-over-year to $35 million. And this translated to diluted earnings per common share of $0.13. Although this represents an improvement of 86% compared to the same period last year, our profitability was impacted by higher interest expense in addition to increased G&A expenses in connection with conference and client engagement activities during the three-month period. As previously discussed, in addition to making disciplined investments to strengthen our core capabilities, we also continue to invest in our compliance infrastructure in each region, bolstering our operations and implementing best practice training programs to continue to promote a culture of compliance across the platform. We expect the non-compensation expenses related to this activity to continue over the coming year. Development costs for the quarter were also higher, primarily due to ongoing investments in connection with the growth of our wealth management operations. In addition to increased professional fees and certain exceptional items incurred during the period. About half of the quarter-to-quarter increase in our non-compensation expense is not expected to recur in future run rates. Reflecting confidence in the strength and consistency of earnings generated by our wealth management business, our Board of Directors has approved a dividend per common share of $0.085, which is in line with the previous quarters. On that note, I’m very pleased to report another strong quarterly performance from our wealth management division as we continue to execute against our long-term growth strategy. Client assets grew to a record $106 billion, driven by rising equity markets, solid advisor retention and recruiting, and positive flows in our managed portfolio products. This reflects a year-over-year increase of 19% in North America, 23% in Australia, and 11% in the UK & Crown Dependencies, where client assets reached a new record of $61 billion. We ended the quarter with modestly positive net inflows, primarily driven by organic growth efforts in all regions. Grows inflows continue to be offset by outflows as clients access their investments in an environment of elevated inflation and interest rates. We are hopeful this trend will soon change. On a consolidated basis, our wealth management businesses earned record quarterly revenue of $216 million, a year-over-year improvement of 13%, and a sequential improvement of 8%. The adjusted pre-tax net income contribution from this division amounted to $33 million, which was in line with our prior quarter and 8% lower than the same period a year ago, largely due to higher interest costs and increased development costs, primarily in connection with our growth activities in the UK & Crown Dependencies. Looking at contributions by region, our business in the UK & Crown Dependencies contributed 50% of the revenue and 68% of the pre-tax net income earned in this division for the three-month period. First quarter revenue of $107.5 million increased by 4% compared to the same period last year and is a new quarterly record for this business. The adjusted pre-tax net income contribution from this business amounted to $23 million, which was 15% lower than the same period a year ago in connection with our previously mentioned investments in growth. For the three-month period, normalized EBITDA was approximately £19 million. We have had an excellent experience integrating the team from Intelligent Capital and we’re on track to complete our previously announced acquisition of Cantab Asset Management within the next three months, subject to regulatory approval and other customary closing conditions. Our North American wealth business generated $90 million in fiscal first quarter revenue, which increased by 24% compared to the same period a year ago and primarily reflects a 23% increase in commission and fee revenue as market participation levels have increased. We continue to emphasize the growth of fee generating account types in this business. For the first quarter, fee-based revenue was 48% but down modestly compared to Q4, given the uptick in transactional revenue. Notably, revenue from corporate financing activities increased by 37% year-over-year and 72% sequentially to $7.5 million. While this amount remains below historical levels, it points to an encouraging trend of improving confidence. Interest revenue continues to be substantial, representing 18% of total revenue in this business. As interest rates begin to decline, we would expect the associated decrease in interest revenue to be more than offset by higher transaction revenue as lower borrowing costs are generally positive for activities in our trading, ECM, advisory and securities lending segments. Client assets of $38 billion were marginally lower than the record set in the prior quarter. Notably, our average practice size reached a new record of $270 million and continues to be amongst the largest in the Canadian wealth management industry. And finally, we continue to experience solid momentum in our Australian Wealth business, which generated its strongest quarterly revenue of $18 million, an increase of 8% sequentially and 21% year-over-year. Managed client assets improved by 23% year-over-year to $6.6 billion, a new high for this business. Excluding significant items, this business contributed pre-tax net income of $1.2 million. While improving, net income continues to be impacted by our planned investments to support growth in this business. I will also note that we added four new investment advisors in the region in this quarter. The momentum we are experiencing in all our wealth businesses is helping us to attract a solid pipeline of talented prospects. Turning to the performance of our capital markets division, which had the most notable revenue improvement in the quarter. On a consolidated basis, revenue of $206 million for the three-month period was in line with the prior quarter, an increased by 41% year-over-year, primarily driven by higher corporate financing and advisory revenues. Our advisory and corporate finance segments both benefited from an improved backdrop for mid-market activities. We are also experiencing remarkable cross-border collaboration that is not only achieving positive outcomes for our clients, but also reinforcing our market position within our selected verticals. Revenue from corporate finance activity improved by 121% year-over-year to $65 million, reflecting increased contributions from each of our geographies. The most substantial contribution in this segment were Canada and Australia, which reported year-over-year increases of 235% and 99% respectively. While the mining sector continues to be our most active, comprising 47% of revenue in the segment, we are pleased to see a modest improvement in activity levels in our other core focus sectors. While it is still early days, we’ve been pleased to see the beginning of a rotation away from U.S. mega-cap stocks into broad markets, which includes smaller cap growth companies. We are ranked among the league table leaders in each of our geographies and notably ranked second in Canada for transaction volume and proceeds raised for the fiscal quarter. This performance highlights our team’s agility in adapting to changes in the market environment and their steadfast dedication to helping our clients achieve their goals. Advisory fees also improved notably to $67 million for the three-month period, which reflects an improvement of 66% compared to the same period last year, but was still slightly lower than Q4, where we also benefited from a substantial transaction in the technology sector. Our U.S. business continues to be the largest contributor in this segment and first quarter revenue improved by 78% year-over-year and 84% sequentially to $45 million. The technology sector was the most productive, accounting for 70% of our advisory business globally. Principal trading and commission and fee activity remained relatively strong but revenue in both segments declined when compared to the prior fiscal quarter, reflecting seasonal declines. Excluding significant items, the pre-tax net income contribution from this division amounted to $13 million, a substantial improvement from both the prior quarter and years comparison periods. Each of our geographies contributed positively, except for our U.S. business, which reported a small loss, primarily reflecting increased G&A expenses in connection with our upcoming Global Growth Conference and the aforementioned investments in our compliance infrastructure. In closing, while we are encouraged by indications that we are on a path toward more normalized economic conditions relevant to our core businesses, we expect bouts of volatility from quarter to quarter given the ongoing geopolitical and macroeconomic overhangs. With interest rates poised for further declines, we expect improved corporate finance and M&A activities and improved risk appetite, which bodes well for client engagement in both our wealth and capital markets businesses. Regardless of the backdrop, we are continuing to execute against our long-term strategy and remain focused on operating in the best interest of our clients and fellow shareholders. With that, Don and I will be pleased to take your questions. Operator, can you please open the lines?

Operator: [Operator Instructions] Your first question comes from Jeff Fenwick with Cormark Securities. Your line is now open.

Jeff Fenwick: Hi, good morning, everyone.

Dan Daviau: Good morning, Jeff.

Jeff Fenwick: So, Dan, I want to start with wealth management. You highlighted the development costs being higher through the quarter. I think that was a factor in Canada and the U.K. Can you just remind us what all gets included in that bucket? I tend to think about it in terms of business development and recruiting, but what sort of items get tucked in that expense line?

Dan Daviau: I’ll let Don go through that.

Don MacFayden: Hi, Jeff. It’s Don. Generally, it would be focused on costs associated with new hires as well as platform costs for systems development, those kinds of things.

Jeff Fenwick: Okay. I guess this is maybe in advance of some teams joining here. You called out this being elevated and then it falls away. So this is then tied to some new folks joining the platform?

Dan Daviau: Yes, I think new folks as well as retention. Both things would fall in that. So yes, we see that – you saw a big increase in that line item over the quarter – it’ll be higher than it was last year, because we continue to recruit aggressively, but that level of elevation won’t stay. The other point Don raised was systems costs and development costs inside our wealth business. We’re putting in place a lot of systems, and we’ve hired some consultants to get that organic growth continuing to move up. A lot of that was expensed in the quarter. S that line item won’t stay at those elevated levels.

Jeff Fenwick: Thanks for that. And then with respect to recruiting, we haven’t seen a lot of activity I guess in Canadian wealth management for a while. The team count went down a little bit. I’m not sure if that’s departures or maybe just some consolidation across the advisor base here. But, maybe you can speak to the pipeline of opportunities there, and your level of focus on that versus the organic initiatives you mentioned?

Dan Daviau: Yes, for sure. The number of teams going down was consolidation, not departing advisors. We consolidated a couple of teams. And yes the pipeline is lumpy. Remember – we’ve hired 60 plus advisors, brought in excess of – $20 billion in assets. We’re still on the same pace. From quarter-to-quarter, you’re going to see a little bit of volatility, but we’re optimistic that we’re going to continue to have the same pace of recruiting as we’ve had. We’ve got a great pipeline just over the summer. Nobody came in, but I suspect that’ll change in the fall, if things go according to plan. If you could hear me knocking on wood, I’d be knocking on wood right now. That’s in the Canadian market. In the U.K. market, we’ve started to recruit into that market. We’ve brought on a number of front office professionals. That obviously takes longer in the U.K. for those assets to flow into our results just, because the transition of the books takes a lot longer. We’re also aggressively recruiting in Australia. We brought on a number of advisors. As I mentioned last time, we opened up an office in Adelaide. We just brought on two new advisors in Sydney. And again, we’ve got a pretty aggressive pipeline of advisors joining us in that market as well. So reputationally, we put the firm in a place where advisors are very comfortable coming here, and spending the most productive years of their careers. So we won’t be changing our view, as to what we can do from a recruiting front.

Jeff Fenwick: Okay. Thanks. And then, within the U.K., it looked like the compensation costs as a percent of revenue climbed up a little bit. Maybe that’s partly the factors you mentioned about bringing people in in advance of the assets joining…?

Don MacFayden: A little bit, but a lot of it just stock-based comp moves that flow through that division. But a little bit of the hiring was done to.

Dan Daviau: Yes, there will be a little bit of noise from the acquisition that came on board. A small one in Glasgow at the start of the quarter.

Jeff Fenwick: Okay. Thanks.

Dan Daviau: Just some noise from that.

Jeff Fenwick: And then maybe just one more here within the capital markets business. In the U.S., a question on your G&A. I’m just wondering if there are some items that get front-end loaded through the fiscal year here that, caused that to be elevated in the first quarter. When I look year over year, that number was flat, a little over approaching $11 million, but that’s more than double sequentially there. So I’m just trying to get a feel for that?

Dan Daviau: Yes, I think Don alluded to it. I certainly alluded to. Like there has been an uptick in our non-compensation costs. It’s just not as much as what we put through in the first quarter. You’ve already asked about the development line, which we see coming down. But there’s another line which we see coming down, because there is some front-end loaded costs. Like on Monday, I’ll be down in Boston with our massive global growth conference that has some expense implications earlier in the year, as opposed to later in the year. It’s a huge – it’s a massive conference with thousands of people at it. So there is some front-end loading of T&E and G&A in that quarter, which is unfortunate, because our revenue was strong and our earnings.

Don MacFayden: If you look at our historical margins, our earnings should have been stronger this quarter as well. Again, a fair number of not one-time in the sense that we adjust them out, but non-repeatable costs in the quarter.

Jeff Fenwick: Yes, that’s helpful color. Thank you. I’ll re-queue.

Dan Daviau: Thanks, Jeff. Good questions.

Operator: Your next question comes from Stephen Boland with Raymond James. Your line is now open.

Stephen Boland: Yes, good morning. Can you talk about, I guess, I’m not sure if this is new disclosure. I apologize if this was presented last quarter. But I guess you identified that U.S. trading provision that was set. I guess you identified that it’s the U.S. trading operation that you had to set the provision up and that it could go, the pressure may have to go up. Can you just talk any kind of details around that?

Don MacFayden: Yes, details is a difficult one. But yes, we continue to actively engage with our regulators. I think everyone knew it was U.S. regulators. It was always reported when we made the provision. We made the provision in our supplemental financials in the U.S. business. I’ve been actively talking about it, about it being our market-making operation, our wholesale operation in the U.S. So, we continue to actively engage with them, trying to come up with a potential resolution. We don’t really have any substantive updates, but we thought we’d provide greater clarity. And we hope to be able to do that in the upcoming quarters. As we previously discussed, and you’ve seen the escalation in our cost line, we continue to make a significant amount of additional investment, both financially. But also from a process standpoint in our firm-wide compliance infrastructure. So, and that includes the matters under review in the U.S. So listen, we’ve got a very strong culture of compliance here, and that continues to be very important. That’s not only in the U.S., that’s globally. So as I think, you’re in the business, being in the business is harder-and-harder from a compliance perspective, and we’re certainly investing what we need to, to be very compliant.

Stephen Boland: How much it would be, like, if you put another 5, 10, 15, 20 million in, like, is it just a bit early to decide how much?

Don MacFayden: Yes, yes. Again, if we could decide, we would decide. But there’s just too much uncertainty to really, regarding what the ultimate resolution would be. And I’d love to give you better clarity if I could, but I can’t even speculate on a range.

Stephen Boland: Yes. Maybe just going, following up on Jeff’s question on the U.S. capital markets, I mean, the revenue, sequentially up, but this division tends to struggle over the last couple of years, or at least the last, six, seven quarters. The revenue seems to go up, but the profitability isn’t there. Is there, besides, getting the revenue to maybe $100 million, which seems to be the threshold of profitability, is there anything that can be done to get that division into profitability?

Don MacFayden: Yes, well, as you said, the revenue has moved up, both on the new issue side and on the M&A side. Revenue is increased, our profitability has improved, but not nowhere near the way it used to be in terms of what was there. So, part of it is a cost issue, and that’s some of the increased investments we’ve been talking about. But at the end of the day, yes, we’re looking at all kinds of ways, to streamline that business, to create more consistent levels of profitability. Remember that, no one likes to talk about the pandemic. This is a business that was making $150 million in pre-tax net income. It funded all the share buybacks and everything we did. So, it’s a capital markets business, so you’re going to see some volatility. But even pre-pandemic and pre-some of these acquisitions we did, this business was making $20 million, $30 million, $40 million a year in pre-tax net income. So, yes, we’ve had, you know, a couple of quarters of losses, including a marginal loss this quarter, but both are, we feel pretty confident that we’ll ultimately get this business, maybe not to that $150 million level of profitability, but certainly consistently profitable.

Stephen Boland: Okay. I guess my last question, Dan, I always ask you this, but optimism, your comments, seeming that, again, there may be a shift going into mid-market away from large cap that benefits your business for sure. Is that, your expectation for the latter half of this year? Is that over the next 18 months that continues to improve?

Dan Daviau: Yes. I mean, we’ve got, we always have really reasonable visibility on our M&A business. So, that’s, and we think that’s going to be relatively consistent here. Obviously, as interest rates will fall and credit markets continue to open up. We’re going to see increased, we believe in the short-term, we’re going to see increased activity in M&A. Obviously it takes a while for those revenues, to flow through on our financial statements. That’s the easy thing to predict. The hard thing to predict, is the new issue revenue as we both know. And in particular, this quarter, the quarter that we’re currently in is the hardest quarter, to predict new issue revenue, because a lot of it happens late in the quarter, September. It doesn’t happen in July and August as much as you know. So, really hard for me to give guidance for this quarter, but on balance over the next several quarters, we see that secular shift out of mining into broader sectors. We see the secular shift out of the mega caps into some of the mid-caps and smaller caps where we tend to do, substantially better. I think we’re still a ways away from an IPO market, and we also tend to do proportionally better in a stronger IPO market. I think we’re a little bit away from that. And then, depending on who you want to listen to, that may be several quarters away. So, I’d like to think we’re – certainly on an upward line, but I think it’s just a bouncy line for now. Hard to give better guidance than that, Steve.

Stephen Boland: Well, appreciate your views. Thanks very much, guys.

Dan Daviau: Thank you.

Operator: Your next question comes from Graham Ryding with TD Securities. Your line is now open.

Dan Daviau: Hi, Graham.

Graham Ryding: Good morning. Just a couple from me. On the Canadian wealth side, the AUA, I think, was a flat quarter-over-quarter and year-over-year, maybe growth has been muted. Were there any departures or anything in particular, client outflows, anything dragging the growth on the Canadian wealth side?

Dan Daviau: No departures. Marginal net new asset growth, marginal this quarter. No outflows, no recruiting. So, it was a pretty flat quarter. That’s the bad news. The good news is, higher proportion of our revenue and fee-based revenue, higher proportion in discretionary assets, higher book per advisor, those are all good profitability measures. And again, similar to the U.K. and similar to our other wealth businesses, we’re investing in growth. We’re spending money so that, we can continue to grow that business organically. And we’ve got a number of projects ongoing to bolster that growth effort. So, in addition to our historical recruiting growth, we’re doing things that will facilitate net new asset growth. And as I indicated on the last call, Graham, next quarter, I believe we will start disclosing everything we need to disclose which, is the – in terms of being better visibility in all of our wealth businesses. And exactly how they’re growing or how they’re, in this particular quarter, not growing from an asset perspective. Globally, we did hit another record – assets. So, things are moving generally in the right direction, although the summer is always a tough period to show significant growth in.

Graham Ryding: Okay. And then my only other question would just be cash sweep income has been a bit of a headline issue in the U.S. wealth space. Can you just give us a bit of context, or color on how material, interest income from client cash is for your Canadian and U.K. wealth businesses? And are there some other items in there perhaps that are also contributing to that revenue line?

Dan Daviau: Yes, again, in our supplemental financials, we disclose our interest income as I know you know. So, I’ll let Don answer the question, and then I’ll pull out your stat.

Don MacFayden: Well, I think in Canada, we do have an active margin book. So, margin loans are probably the biggest contributor to the interest revenue in Canada. Client cash is certainly a component, but margin loans, and that’s why it’s changed. It’s tied to market rates, tied to prime and so forth.

Dan Daviau: And in the U.K., our cash sweep, what you’re referring to is, it’s a relatively consistent number. So, and they tend to offset each other, as interest rates go down. And let’s say our margin lending book in Canada has less revenue, because interest rates go down. That would tend to be offset with an increase in new issue revenue, which although improved this quarter, is still significantly below historical levels.

Graham Ryding: Okay. Understood. That’s it from me. Thank you.

Dan Daviau: Thank you.

Operator: There are no further questions at this time. I will now turn the call over to Mr. Daviau for closing remarks.

Dan Daviau: Okay. Well, thank you, operator. And thanks for everyone who’s joined us today. It certainly concludes our first quarter fiscal conference call. As always, Don and I are around to answer questions. Our annual general meeting will be taking place today at 10 a.m. If you choose to join, it’s virtual. Welcome to your participation. Access details were provided in the information circular, and they’re also on our website. Our Boston Growth Conference is next week. We’re super excited by it. Huge attendance, as is always, and excited by the opportunities that come from that. So operator, you can close the lines now. And thank you again.

Operator: Ladies and gentlemen, this concludes the conference call. Thank you for participating. Please disconnect your lines.

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