Moelis & Company — Q1 2023 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2023. Moelis is a global investment bank focused on advisory services, including M&A, restructurings, capital markets and other corporate finance matters. It reported one business segment and 766 advisory bankers at quarter-end.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $187.8 million | $302.1 million |
| Operating expenses | $189.2 million | $212.7 million |
| Operating income (loss) | $(1.4) million | $89.4 million |
| Net income, consolidated | $3.6 million | $73.6 million |
| Net income attributable to Moelis & Company | $3.7 million | $65.7 million |
| Basic / diluted EPS | $0.05 / $0.05 | $1.01 / $0.94 |
| Cash flow from operating activities | $(152.1) million | $(272.5) million |
- Revenue fell 38%; operating expenses declined 11%. Compensation and benefits were $148.2 million, down 16%, while non-compensation expenses rose 14% to $41.0 million.
- Operating expenses were 101% of revenue, versus 70% a year earlier. Compensation was 79% of revenue, versus 58%.
- Cash, cash equivalents and restricted cash were $135.4 million at March 31, down $72.2 million from year-end. Investing activities provided $170.2 million, mainly from investment sales; financing used $90.6 million, including dividends, tax distributions and treasury-stock purchases.
- Investments were $91.7 million, compared with $265.2 million at December 31, 2022. Accounts receivable, net, was $31.6 million, down from $47.8 million.
- The company reported no borrowings under its $65 million and $30 million revolving facilities. Available capacity was $64.2 million and $30 million, respectively, subject to facility terms and letters of credit. Lease liabilities were $189.6 million.
- The tax receivable agreement liability was $304.8 million; management estimated $21.7 million would be due within one year. The company reported a $435.5 million deferred tax asset.
Material changes and management commentary
- Management attributed lower revenue to fewer completed transactions and lower average fees per transaction. Revenue-paying clients declined to 127 from 145, and clients paying fees of at least $1 million declined to 40 from 58.
- Management said global completed M&A transactions above $100 million fell 46% year over year, compared with Moelis revenue declining 38%. It cited continued client dialogue, but cautioned that engagement may not quickly convert into revenue.
- Management reported restructuring mandates increasing over the prior year amid elevated corporate debt, higher interest rates and inflation. It also described ongoing capital-markets advice on clients’ funding and liquidity needs.
- Other income was $1.7 million, versus other expense of $2.2 million, reflecting investment and cash-equivalent income and MA Financial earnings, partly offset by fair-value losses on equity investments.
- Quarterly operating cash outflow was attributed primarily to cash operating outflows, including discretionary bonuses paid, net of client collections. Management noted first-quarter cash declines are typical due to bonus and partner tax payments.
Outlook, risks and unusual items
- No quantitative revenue or earnings guidance was provided. Management cited rising interest rates, inflation, the war in Ukraine and increased regulation as sources of uncertainty, while describing the firm as well positioned through client coverage and a balanced business model.
- Transaction-based fees depend on successful closings and may be delayed or lost because of approvals, financing, market conditions or other factors. Revenue and earnings can therefore vary substantially between periods.
- Most U.S. and U.K. bank balances exceeded applicable deposit-insurance limits; the filing notes there is no assurance uninsured deposits would be protected in a bank failure.
- The company is responding to an SEC information request related to an industry-wide investigation into broker-dealer recordkeeping of business communications. A stockholder class action filed in Delaware in March 2023 challenges provisions of the company’s Stockholders Agreement. The company said it could not estimate potential losses and did not believe pending matters would have a significant adverse effect based on current knowledge.
- The board declared a $0.60-per-share dividend payable June 23, 2023. A new Los Angeles office lease commenced in April, with an initial term through 2034 and an estimated $15 million right-of-use asset and lease liability to be recorded in Q2.
- Disclosure controls were deemed effective; the filing reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether client activity and transaction completions recover enough to improve revenue and the expense-to-revenue ratio.
- Cash conversion and collections, including the seasonal impact of compensation and partner tax distributions.
- Available revolving-credit capacity and upcoming facility renewal or maturity terms.
- Timing and amount of tax receivable agreement payments, and the assumptions supporting the deferred tax asset.
- Developments in the SEC recordkeeping inquiry and Delaware stockholder litigation.
- Execution and cost impact of the new Los Angeles lease and the announced dividend.