Westwood Holdings Group Inc. - Q1 2009 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2009. Westwood Holdings Group, Inc. operates through two primary subsidiaries: Westwood Management Corp., which provides investment advisory services, and Westwood Trust, which offers trust and custodial services. The company's revenue is primarily derived from fees based on a percentage of assets under management (AUM).
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $8.2 million | $9.1 million |
| Net Income | $1.2 million | $2.0 million |
| Diluted EPS | $0.19 | $0.31 |
| Operating Cash Flow | $1.6 million | $2.3 million |
| Cash and Cash Equivalents | $2.5 million | $3.5 million (Dec 2008) |
| Total Investments | $31.6 million | $28.2 million (Dec 2008) |
| Long-Term Debt | $0 | $0 |
| Working Capital | $35.9 million | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 10% year-over-year. Asset-based advisory fees fell 4% and trust fees dropped 12%, driven by market depreciation of assets and client withdrawals, partially offset by new inflows.
- Investment Losses: "Other revenues, net" turned negative at $(0.3) million, a significant deterioration from $(0.01) million in Q1 2008, due to increased net realized and unrealized losses on investments and lower interest income.
- Profitability: Net income declined 37% to $1.2 million. Income before taxes dropped 36% to $1.9 million.
- Expense Growth: Total expenses increased 3% to $6.3 million. Notable increases included WHG mutual fund expenses (up 406% due to legal costs) and information technology costs (up 19%). Employee compensation remained flat despite a headcount increase from 55 to 63, as higher restricted stock and salary costs were offset by lower incentive compensation.
- Assets Under Management (AUM): Total AUM decreased 4% to $7.2 billion from $7.5 billion in the prior year.
Outlook, Risks, and Management Commentary
- Liquidity: The company reported no long-term debt and working capital of $35.9 million. Management believes current cash and short-term investments are sufficient to meet operating requirements for at least the next 12 months.
- Dividends: A quarterly cash dividend of $0.30 per share was declared on February 5, 2009, payable April 1, 2009.
- Stock-Based Compensation: The company granted 232,000 shares of restricted stock in February 2009. Approximately $18.9 million of unrecognized compensation cost remains to be recognized over a weighted-average period of 2.5 years.
- Risks: Key risks include the significant concentration of revenues in four customers, dependence on financial market performance for AUM valuation, competitive fee pressures, and the ability to retain qualified personnel.
- Non-GAAP Measures: Management highlighted "Cash Earnings" of $2.7 million (down 14% from prior year), which adds back non-cash equity-based compensation to net income.
Investor Verification Checklist
- Verify the sustainability of revenue given the 4% decline in AUM and the heavy reliance on four major customers.
- Assess the impact of unrealized investment losses on future "Other revenues" and overall profitability.
- Review the trajectory of WHG mutual fund expenses, which saw a 406% spike due to legal costs.
- Confirm the company's ability to maintain its dividend policy ($0.30/share) amidst declining net income.
- Monitor the vesting conditions for CEO and CIO performance-based restricted stock, which are tied to adjusted pre-tax income targets.