Westwood Holdings Group Inc. - 10-Q Summary
Business Context and Reporting Period
Company: Westwood Holdings Group, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2008
Business Overview: Westwood operates through two primary segments: Westwood Management (investment advisory services) and Westwood Trust (trust and custodial services). Revenue is primarily derived from fees based on a percentage of Assets Under Management (AUM). As of September 30, 2008, total AUM was $8.28 billion, an 8% increase from the prior year.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenues | $10,092 | $28,870 |
| Net Income | $1,736 | $5,422 |
| Earnings Per Share (Diluted) | $0.27 | $0.84 |
| Operating Cash Flow | Not provided for 3 months | $(5,188) (Used) |
| Cash and Cash Equivalents | $2,941 | $2,941 |
| Total Assets | $40,748 | $40,748 |
| Total Liabilities | $7,114 | $7,114 |
| Long-Term Debt | $0 | $0 |
Profitability: The company reported a net income margin of approximately 17.2% for the nine months ended September 30, 2008. Stock-based compensation expense was significant, totaling $4.9 million for the nine-month period.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 15% for the quarter and 20% for the nine-month period compared to 2007. Asset-based advisory fees drove this growth, rising 28% (quarter) and 33% (nine months) due to net inflows and higher fee realization, partially offset by market depreciation.
- Expense Increases: Total expenses rose 20% for the quarter and 22% for the nine months. Employee compensation and benefits increased 18% (quarter) and 23% (nine months), driven by headcount growth (63 employees vs. 51 in 2007), salary increases, and higher stock-based compensation.
- Other Revenues: Other revenues turned negative for the quarter ($(134)k) and dropped 87% for the nine months, primarily due to lower interest rates and a shift into lower-yielding U.S. Treasury Bills, as well as reduced investment gains.
- Cash Flow: Operating cash flow turned negative for the nine-month period ($(5.2) million) compared to positive $6.2 million in the prior year. This was principally due to net purchases of trading securities (shifting into U.S. Treasury Bills) which offset operating earnings.
Guidance, Outlook, and Risks
Management Commentary: Management highlighted that AUM growth was driven by inflows from new and existing clients. They noted they are on track to earn a performance-based fee in the fourth quarter of 2008, though the exact amount remains uncertain until the performance period ends on December 31, 2008. The company utilizes non-GAAP "cash earnings" to evaluate performance, which increased 22% to $10.3 million for the nine months ended September 30, 2008.
Liquidity: The company has no long-term debt and maintains working capital of $30.4 million. Management believes current cash and short-term investments are sufficient to meet requirements for the next twelve months.
Risks and Contingencies:
- Market Risk: Revenue is highly dependent on AUM, which fluctuates with financial markets and interest rates.
- Concentration Risk: Significant concentration of revenues in four major customers.
- Competitive Pressure: Risks related to maintaining fee structures in a competitive marketplace.
- Legal: No material legal proceedings are currently pending.
Investor Verification Checklist
- Performance Fee Realization: Verify if the anticipated fourth-quarter performance-based fee is recognized in the Q4 2008 results, as this impacts full-year earnings.
- Stock-Based Compensation: Monitor the impact of restricted stock grants on future expense lines, as $15.3 million of unrecognized compensation cost remains to be amortized over 2.2 years.
- Investment Portfolio Shift: Confirm the impact of the shift to U.S. Treasury Bills on future "Other Revenues" and interest income given the low-interest-rate environment.
- Customer Concentration: Assess the stability of the top four clients which represent a significant portion of revenue.
- Cash Flow Sustainability: Review future operating cash flows to ensure the negative operating cash flow in Q3 2008 was a temporary result of investment portfolio rebalancing rather than operational deterioration.