Business Context and Reporting Period
Westwood Holdings Group, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2021. The company provides investment advisory, trust and custodial services. Revenue is primarily based on assets under management (AUM). Westwood International Advisors was liquidated effective September 30, 2020, following the prior liquidation of the UCITS Fund.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $18.3 million | $16.7 million | 10% |
| Net operating income | $0.8 million | $0.4 million | Increase |
| Net income | $4.1 million | $1.1 million | 272% |
| Diluted EPS | $0.52 | $0.13 | Increase |
| Operating margin | 4.2% | 2.5% | Improved |
| Net margin | 22.4% | 6.6% | Improved |
| Economic earnings | $6.3 million | $4.2 million | 50% |
| Economic EPS | $0.79 | $0.50 | Increase |
| AUM at period end | $14.5 billion | $11.6 billion | 25% |
| Cash and cash equivalents | $13.0 million | $45.1 million | Lower year over year |
| Cash and short-term investments | $86.9 million | $82.6 million at Dec. 31, 2020 | Increase |
| Total debt | None | None | No change |
Revenue and Profitability
- Asset-based advisory fees decreased 6% to $10.5 million.
- Performance-based advisory fees were $2.0 million, compared with none in the prior-year quarter.
- Trust fees increased 2% to $6.1 million.
- Employee compensation and benefits declined 9% to $11.5 million, primarily due to lower headcount and stock-based compensation.
- Net income included an $8.3 million realized gain from the redemption of the company’s original InvestCloud shares, partly offset by a $2.3 million net unrealized depreciation on private investments.
- The effective income tax rate was 41.5%, compared with a benefit in Q1 2020. The higher 2021 rate primarily reflected permanent tax differences related to restricted stock expense.
Cash Flow, Liquidity and Capital
- Operating activities used $7.0 million, compared with $11.5 million provided in Q1 2020. The 2021 usage reflected purchases of current investments, lower compensation payables and higher accounts receivable.
- Investing activities provided $9.7 million, primarily from investment sales and the sale of property and equipment.
- Financing activities used $2.7 million, including $0.8 million of dividends, $1.0 million of treasury-stock purchases and $0.9 million of restricted stock withheld for taxes.
- Working capital was $91.3 million at March 31, 2021, compared with $84.5 million at December 31, 2020.
- Westwood Trust had approximately $13.7 million in excess of its $4.0 million minimum restricted-capital requirement.
- Management stated that existing cash, short-term investments and expected operating cash flow should satisfy ordinary operating and capital requirements for at least the next twelve months, while noting that additional financing could become necessary.
Material Changes Versus the Prior Comparable Period
- AUM increased $2.9 billion, or 25%, to $14.5 billion. The increase reflected $0.9 billion of market appreciation and $0.6 billion of net client inflows.
- Mutual-fund AUM increased 71% to $2.6 billion; institutional AUM increased 19% to $7.6 billion; wealth-management AUM increased 16% to $4.4 billion.
- Revenue growth was driven by performance-based fees and higher AUM, despite lower asset-based advisory fees.
- Profitability benefited materially from the $8.3 million InvestCloud realized gain and lower operating expenses; the gain is not necessarily recurring.
- The company reinstated its quarterly dividend at $0.10 per share after suspending it in Q2 2020 amid COVID-19 uncertainty. A further $0.10-per-share dividend was declared on April 28, 2021, payable July 1, 2021.
- The company repurchased 92,491 shares for $1.4 million at an average price of $15.19 per share.
- Westwood sublet approximately 10,000 square feet of its Dallas office through the fourth quarter of 2025 and terminated its Toronto office lease.
Outlook, Risks and Unusual Items
- Results remain sensitive to the level and composition of AUM, market performance, client flows, fee pressure and client-retention trends.
- Key disclosed risks include competition, concentration of revenue among a small number of customers, investment-strategy performance, personnel retention, cybersecurity, operational and vendor risks, regulation, litigation, COVID-19 effects and the company’s ability to maintain dividends and fund future capital needs.
- The company continues to operate with a remote-work and cloud-based technology infrastructure supporting business continuity.
- The $8.3 million InvestCloud gain and the $2.3 million unrealized private-investment depreciation materially affected reported earnings and may create period-to-period volatility.
- Management reported no material change in previously disclosed risk factors, no legal proceedings, no significant market-risk changes and effective disclosure controls and internal controls during the quarter.
Facts Investors Should Verify
- Whether performance-based revenue and the InvestCloud gain are recurring or represent one-time benefits.
- Whether AUM growth, particularly in mutual funds and the SmallCap strategy, persists and converts into higher recurring advisory fees.
- The sustainability of positive client flows and the impact of market declines on fee revenue and liquidity.
- The company’s ability to maintain the $0.10 quarterly dividend and continue share repurchases while operating cash flow is volatile.
- The valuation sensitivity of the $3.9 million Level 3 private-equity investment and other private investments.
- Whether the company’s stated liquidity remains sufficient if operating cash flow weakens or additional strategic investments and capital requirements arise.