Moelis & Company — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Moelis is a global independent investment bank focused on advisory services, including M&A, restructurings and other corporate finance matters.
Financial performance
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Revenue | $172.1m | $131.7m | $345.4m | $258.1m |
| Operating income | $42.7m | $30.6m | $85.7m | $59.5m |
| Operating margin | 24.8% | 23.2% | 24.8% | 23.0% |
| Net income, consolidated | $49.5m | $26.2m | $88.9m | $51.8m |
| Net income attributable to Moelis & Company | $19.7m | $6.9m | $35.0m | $13.9m |
| Diluted EPS attributable to Class A holders | $0.57 | $0.29 | $1.04 | $0.60 |
| Operating cash flow | Not reported quarterly | Not reported quarterly | $72.6m | $14.5m |
- Revenue rose 31% in Q2 and 34% in H1. Management attributed H1 growth to more completed transactions, higher average fees, and increased M&A and restructuring activity.
- Operating expenses increased 28% in Q2 and 31% in H1, slower than revenue growth. Expenses were 75% of revenue in both 2017 periods versus 77% in the comparable 2016 periods.
- Compensation and benefits were 59% of revenue in both years’ comparable periods. Equity-based compensation expense was $49.7m in H1, versus $38.7m in H1 2016.
- Q2 other income and expenses included gains associated with Moelis Australia’s IPO and subsequent dilution: approximately $15.2m and $2.3m. H1 other income and expenses totaled $17.9m, versus $0.2m a year earlier. Q2 equity-method investment results were a $1.3m loss.
Liquidity, capital and distributions
- Cash and cash equivalents were $179.9m at June 30, down $139.0m from year-end 2016. The company also held $78.4m of investments at fair value and $28.4m of equity-method investments.
- H1 operating cash flow was $72.6m; investing cash outflow was $48.3m, primarily for investment purchases; financing cash outflow was $165.1m, primarily for dividends and distributions.
- No borrowings were outstanding under the $40m unsecured revolving facility, which matures June 30, 2019. Availability was $33.0m after $7.0m of letters of credit.
- Total liabilities were $356.6m, including $198.7m due under the tax receivable agreement (TRA). The company recorded a $266.6m deferred tax asset. Under the TRA, eligible managing directors receive 85% of specified tax savings.
- Dividends declared were $1.37 per Class A share in Q2 and $1.74 per share for H1. The Q2 amount included a $1.00 special dividend and a $0.37 quarterly dividend.
Outlook, risks and notable items
- Management described client conversations as robust and global demand for independent advice as growing, citing corporate cash, relatively low interest rates and credit availability as supportive of M&A. No quantified earnings or revenue guidance was provided.
- Management cautioned that advisory revenue depends on individually negotiated engagements and transaction closings; delays or cancellations can reduce fees, and quarterly results may vary materially.
- Risks include transaction and market cyclicality, competition, collection of client receivables, foreign-exchange movements, and regulatory or legal proceedings. Most bank-account balances exceeded applicable U.S. and U.K. deposit-insurance limits. The company does not hedge foreign-currency exposure.
- The company said it was not party to material pending proceedings expected to have a material effect, while noting that losses from ordinary-course legal or regulatory matters could not be estimated. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
- Moelis expected to cease qualifying as an emerging growth company at year-end 2017, potentially increasing compliance costs and management demands. After quarter-end, it declared a $0.37 dividend and completed a 6.0m-share offering, with proceeds used to repurchase equivalent shares or exchangeable interests from certain holders.
Important facts for investors to verify
- How much of revenue and earnings growth reflects recurring advisory momentum versus transaction timing and the Moelis Australia-related gains?
- Whether transaction activity and average fees can sustain growth, given the firm’s dependence on deal completions and quarter-to-quarter variability.
- The timing and cash implications of the $198.7m TRA liability, including potential payments following exchanges or a change of control.
- Cash deployment, dividend sustainability and liquidity after the special dividend and post-quarter share offering and repurchases.
- Potential costs and requirements following the expected loss of emerging-growth-company status, and any material developments in legal or regulatory matters.