Moelis & Company — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; unaudited. Moelis is a global, single-segment investment bank focused on financial advisory services, including M&A, restructurings, capital markets and other corporate finance matters. Unless stated otherwise, amounts below are in U.S. dollars and rounded to millions.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $272.2m | $233.5m | $639.9m | $778.1m |
| Operating income (loss) | $(20.0)m | $35.0m | $(31.0)m | $186.7m |
| Operating margin | (7.4%) | 15.0% | (4.8%) | 24.0% |
| Net income (loss) attributable to Moelis & Company | $(10.7)m | $25.6m | $(19.0)m | $130.3m |
| Class A basic EPS | $(0.16) | $0.39 | $(0.28) | $1.98 |
| Operating expenses | $292.2m | $198.5m | $670.9m | $591.4m |
| Compensation and benefits | $242.2m | $160.4m | $536.3m | $477.2m |
- Revenue and earnings: Q3 revenue rose 17%, which management attributed primarily to a higher average fee per completed transaction. Nine-month revenue declined 18%, driven by fewer completed transactions. The company reported losses for both Q3 and the first nine months.
- Expense pressure: Compensation expense increased 51% in Q3 and 12% year to date; as a share of revenue, it rose to 89% for Q3 and 84% for the first nine months. Management cited higher headcount, Managing Director hiring and discretionary bonuses. Non-compensation expenses also increased, including transaction-related professional fees.
- Cash flow: Nine-month operating cash flow was positive $59.1m, investing cash flow positive $64.0m, and financing cash flow negative $183.0m. Financing outflows primarily reflected dividends, tax distributions and treasury stock purchases. Cash, cash equivalents and restricted cash fell $59.3m to $148.2m.
- Liquidity and obligations: At September 30, cash and cash equivalents were $147.5m, investments were $197.7m, and receivables were $46.5m. The company had no borrowings under its $65m corporate revolver or $30m broker-dealer facility; $64.2m and $30m, respectively, were available. The filing reports $216.9m of lease liabilities and a $304.8m tax receivable agreement liability, including an estimated $21.7m due within one year.
- Capital returns: Dividends declared during the first nine months totaled $1.80 per share. A further $0.60-per-share dividend was declared for payment December 22, 2023. The company repurchased 1.08m shares during the first nine months; $62.5m remained under its authorized repurchase program.
Material changes and management commentary
- Global completed M&A transactions over $100m fell 40% in the first nine months, according to market data cited by management; Moelis revenue declined 18% over the same period. Management said client dialogue remained strong, but engagement does not necessarily translate quickly into fees.
- Management reported an increase in restructuring mandates, particularly out-of-court liability management, amid corporate debt maturities, higher interest rates and inflation. The firm also continued advising clients on capital raising and liquidity needs.
- Other income was $9.9m in Q3 and $6.1m year to date. Year-to-date other income included gains on financial assets and MA Financial earnings, partly offset by a $10m SEC penalty. The comparable 2022 year-to-date period had a $2.7m other expense.
- Total assets declined to $1,120.5m from $1,216.9m at year-end 2022; total equity declined to $380.1m from $458.9m. The filing does not provide a numerical revenue or earnings forecast.
Outlook, risks and unusual items
- Management cited higher interest rates, inflation, military conflicts and increasing regulatory burdens as factors that may add uncertainty. Advisory revenue is transaction-dependent and volatile; timing and completion of transactions are outside the company’s control, and fees can be delayed or lost if deals fail to close.
- The company agreed to an SEC settlement concerning recordkeeping of business communications on messaging applications. It agreed to a censure, a $10m civil penalty and undertakings that include retaining a compliance consultant. The expense was recognized in the first nine months of 2023.
- A putative Class A stockholder lawsuit filed in Delaware seeks a declaration that certain Stockholders Agreement provisions are invalid, as well as attorneys’ fees and costs. The company said it could not estimate a loss or range of loss; it stated that, based on current knowledge and consultation with counsel, it was not party to material pending proceedings expected to have a significant adverse effect.
- Most U.S. and U.K. bank-account balances exceeded applicable deposit-insurance limits. The company noted that government or regulatory intervention to protect uninsured deposits cannot be assured. It does not hedge foreign-currency exposure.
- Group LP was selected for an IRS examination for tax year 2020. The company reported no unrecognized tax benefits for the periods presented.
Important facts for investors to verify
- Whether revenue recovery can continue, given the sharp year-to-date decline in revenue and completed transaction activity.
- How compensation and other expenses will adjust to revenue levels, and whether the elevated expense-to-revenue ratios are temporary.
- The timing and cash impact of the $304.8m tax receivable agreement liability, lease obligations and declared dividends.
- Developments in the SEC settlement undertakings, the Delaware stockholder lawsuit and the IRS examination.
- Exposure to transaction delays or cancellations, market conditions, uninsured bank deposits and foreign-exchange movements.