Westwood Holdings Group, Inc. — Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
Westwood manages investment assets and provides advisory, trust, custodial and related services through Westwood Management, Westwood Trust, Salient and Broadmark Asset Management. The filing covers the unaudited three months ended March 31, 2023, compared primarily with the three months ended March 31, 2022.
- Assets under management were $15.0 billion at March 31, 2023, up 8% from $13.9 billion a year earlier.
- Assets under advisement were approximately $1.2 billion at March 31, 2023, compared with $314 million a year earlier.
- In January 2023, Westwood acquired an additional 32% interest in Broadmark for $1.2 million net of cash acquired, increasing ownership to approximately 80% and resulting in consolidation.
Financial Performance and Key Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenues | $22.7 million | $17.2 million | Up 32% |
| Asset-based advisory fees | $17.0 million | $11.8 million | Up 44% |
| Performance-based advisory fees | $0.6 million | — | New |
| Trust fees | $5.0 million | $5.7 million | Down 12% |
| Total expenses | $21.8 million | $16.8 million | Up 30% |
| Net operating income | $0.9 million | $0.4 million | Improved |
| Net income | $0.7 million | $0.05 million | Improved |
| Net income attributable to Westwood | $0.7 million | $0.05 million | Up 1,286% |
| Diluted EPS | $0.09 | $0.01 | Improved |
| Economic Earnings | $3.6 million | $1.9 million | Up 89% |
| Economic EPS | $0.45 | $0.24 | Up 88% |
- Net operating margin was approximately 4.2% versus 2.4% in the prior-year quarter. Net income margin was approximately 3.1% versus 0.3%.
- Employee compensation and benefits increased to $14.2 million from $10.3 million, primarily due to additional headcount from the Salient acquisition.
- Information technology expense increased 30% to $2.4 million, primarily reflecting additional software licenses and investment research expenses.
- Amortization of intangible assets increased to $1.0 million from $0.4 million.
- Stock-based compensation expense was $1.7 million, compared with $1.4 million.
- Management’s non-GAAP Economic Earnings add back stock-based compensation, intangible amortization and the tax benefit from goodwill amortization.
Cash Flow, Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $16.8 million at March 31, 2023, down from $23.9 million at December 31, 2022.
- Cash and short-term investments totaled $32.3 million, compared with $39.2 million at year-end 2022.
- Operating cash flow was negative $3.2 million, compared with positive $8.8 million in Q1 2022. The current-quarter use included a $5.6 million reduction in compensation and benefits payable.
- Investing cash flow was negative $1.3 million, primarily due to the Broadmark acquisition.
- Financing cash flow was negative $2.7 million, including $1.8 million of dividends paid and $0.8 million related to restricted stock returned for taxes.
- Working capital was $39.6 million at March 31, 2023, compared with $40.6 million at December 31, 2022.
- The company had no debt at March 31, 2023 or December 31, 2022.
- Westwood Trust had approximately $14.3 million in excess of its $4.0 million minimum restricted capital requirement.
- Management stated that existing cash and short-term investments plus operating cash generation should be sufficient for ordinary operating and capital requirements for at least the next twelve months, while noting that additional financing could become necessary.
Material Changes, Outlook and Risks
- The Broadmark acquisition added approximately $1.2 million of revenue and $0.1 million of net income in Q1 2023, and generated $4.2 million of goodwill and $1.0 million of noncontrolling interest.
- Total AUM increased during the quarter by $172 million, consisting of $317 million of market appreciation offset by $145 million of net client outflows.
- Net outflows were primarily associated with the Quality AllCap strategy. Mutual fund AUM increased 40% year over year, while wealth management AUM declined 10%.
- Management did not provide specific quantitative revenue or earnings guidance.
- Revenue remains sensitive to financial-market levels, AUM and AUA composition, client flows, fee pressure and performance-based fee outcomes.
- Other identified risks include competition, client terminations and redemptions, customer concentration, acquisition integration, cybersecurity, information systems, regulatory compliance, litigation, personnel retention, activist stockholders and the company’s thinly traded stock.
- The company reported no legal proceedings, no material changes to previously disclosed risk factors, and no material changes in internal controls. Management concluded that disclosure controls were effective.
- The Board declared a quarterly dividend of $0.15 per share on April 26, 2023, payable July 3, 2023.
- No common shares were repurchased during Q1 2023; $1.9 million remained available under the repurchase program at March 31, 2023.
- The March 31, 2023 filing reflects a subsequent April 3 transaction in which Charis was acquired by Vista Bank and Westwood exchanged its Charis shares for Vista shares.
Important Facts for Investors to Verify
- Reconcile the significant revenue growth with the higher compensation, technology and amortization costs following the Salient and Broadmark transactions.
- Assess whether AUM growth can continue despite $145 million of Q1 net outflows and the company’s dependence on market appreciation.
- Review Broadmark’s integration, operating contribution, goodwill valuation and the potential impact of its noncontrolling interest.
- Monitor cash conversion, particularly the shift to negative operating cash flow and the sustainability of dividends.
- Evaluate the $11.8 million fair value of Salient-related contingent consideration, which depends on revenue projections, volatility, discount rates and payment probabilities.
- Confirm the company’s ability to maintain fee levels, retain clients and fund strategic initiatives without additional financing.