Westwood Holdings Group Inc. 10-Q Summary
Business Context and Reporting Period
Company: Westwood Holdings Group, Inc. (Westwood)
Reporting Period: Quarter and six months ended June 30, 2007
Business Model: Westwood operates through two primary segments: Westwood Management (investment advisory services for pensions, endowments, and mutual funds) and Westwood Trust (trust and custodial services). Revenue is primarily fee-based, derived from a percentage of Assets Under Management (AUM).
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2007 |
Six Months Ended June 30, 2007 |
|---|---|---|
| Total Revenues | $7,957 | $15,310 |
| Net Income | $1,473 | $2,980 |
| Diluted EPS | $0.24 | $0.49 |
| Operating Cash Flow | N/A | $4,394 |
| Cash & Cash Equivalents | $3,946 | $3,946 |
| Total Assets | $31,567 | $31,567 |
| Total Liabilities | $5,788 | $5,788 |
| Long-Term Debt | $0 | $0 |
| Assets Under Management (AUM) | $6.85 billion | $6.85 billion |
Margins: Net income margin for the six months ended June 30, 2007, was approximately 19.5% ($2.98M / $15.31M). The effective tax rate for the six-month period was 34.9%.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 19.9% for the quarter and 16.4% for the six-month period compared to the same periods in 2006. This was driven by a 26.4% increase in AUM to $6.85 billion, attributed to market appreciation and net inflows.
- Profitability: Net income rose 49.4% for the quarter and 30.6% for the six-month period year-over-year. Income before taxes increased 38.6% (quarter) and 25.1% (six months).
- Expense Trends: Employee compensation and benefits increased 14.4% (quarter) and 15.2% (six months), primarily due to higher restricted stock expense, incentive compensation, and headcount growth (50 employees vs. 48 in 2006). Sales and marketing expenses decreased slightly.
- Dividends: The company declared quarterly cash dividends of $0.20 per share in both February and April 2007. Total dividends declared for the six months were $2.66 million.
Outlook, Risks, and Management Commentary
- Outlook: Management expects to recognize similar expense levels related to performance-based restricted stock grants in the third and fourth quarters of 2007. They anticipate current cash and short-term investment balances will be sufficient to meet operating requirements for at least the next twelve months.
- Non-GAAP Measures: Management highlights "Cash Earnings" (Net Income + non-cash equity compensation). For the six months ended June 30, 2007, Cash Earnings were $5.24 million, a 26.9% increase year-over-year.
- Risks: Key risks include significant revenue concentration in four customers, competitive fee pressures, downturns in financial markets affecting AUM, and the ability to retain qualified personnel.
- Accounting Changes: The company is evaluating the impact of new FASB standards (SFAS 157 and 159) regarding fair value measurements, effective for fiscal years beginning after November 15, 2007.
Investor Verification Checklist
- AUM Concentration: Verify the specific identity and stability of the four customers representing a significant concentration of revenue.
- Stock-Based Compensation: Review the $2.26 million restricted stock expense for the six months and the $11.2 million of unrecognized compensation cost expected to be recognized over 2.3 years.
- Dividend Sustainability: Assess the impact of the $2.32 million cash dividend outflow on future liquidity, given the company's reliance on operating cash flow.
- Performance Fees: Confirm the status of performance-based fee components for the CEO and CIO, which are tied to adjusted pre-tax income goals.
- Investment Portfolio: Review the composition of the $19.3 million in company investments (trading vs. available-for-sale) and associated unrealized gains/losses.