Business Context and Reporting Period
Westwood Holdings Group, Inc. is an investment management and trust services company operating through its Advisory and Trust segments. Revenue is primarily tied to assets under management and assets under advisement, making results sensitive to market performance, client flows, fee pressure and investment strategy performance. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023, compared with the corresponding 2022 periods.
In January 2023, Westwood acquired an additional 32% interest in Broadmark Asset Management LLC, increasing ownership to approximately 80% and resulting in consolidation. Broadmark contributed approximately $1.1 million of revenue and $0.1 million of net income in the second quarter.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 |
|---|---|---|---|---|
| Total revenue | $21.9 million | $15.6 million | $44.7 million | $32.8 million |
| Net operating income (loss) | $3.7 million | $(0.4) million | $4.6 million | $0.0 million |
| Net income (loss) | $2.9 million | $(0.4) million | $3.6 million | $(0.3) million |
| Net income attributable to Westwood | $2.9 million | $(0.4) million | $3.6 million | $(0.3) million |
| Diluted EPS | $0.36 | $(0.05) | $0.45 | $(0.04) |
| Economic Earnings | $5.7 million | $1.6 million | $9.3 million | $3.5 million |
| Economic EPS | $0.70 | $0.20 | $1.15 | $0.44 |
Reported operating margins were approximately 16.7% for the second quarter and 10.3% for the first six months, compared with negative or approximately breakeven margins in the comparable 2022 periods. Net margins were approximately 13.2% for the quarter and 8.1% year to date.
- Second-quarter revenue increased 41%, driven primarily by a 53% increase in asset-based advisory fees. Six-month revenue increased 36%, with asset-based advisory fees up 49% and $0.6 million of performance-based fees recognized.
- Trust fees declined 6% in the quarter and 9% year to date, primarily because of lower average assets.
- Total expenses increased 14% in the quarter and 22% year to date, reflecting higher headcount and costs following the Salient acquisition, including increases in compensation, technology, marketing, professional services and amortization.
- Results included non-cash gains from remeasurement of Salient acquisition contingent consideration of $4.1 million in the quarter and $5.1 million year to date.
- Assets under management were $15.0 billion at June 30, 2023, up 24% from $12.1 billion at June 30, 2022. Assets under advisement were $1.2 billion, versus $0.2 billion in the prior-year period.
- Second-quarter AUM benefited from $0.5 billion of market appreciation but was reduced by $0.5 billion of net client outflows. Six-month AUM increased $0.2 billion, comprising $0.8 billion of market appreciation and $0.6 billion of net outflows.
Cash Flow, Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $15.2 million at June 30, 2023, down from $23.9 million at December 31, 2022.
- Cash and short-term investments totaled $38.1 million, compared with $39.2 million at year-end 2022. Working capital was $41.0 million, compared with $40.6 million.
- Operating activities used $3.9 million in the first six months of 2023, compared with $12.1 million provided in the prior-year period. The 2023 outflow included $7.1 million of net sales of trading securities and a $3.3 million reduction in compensation liabilities.
- Investing activities used $0.8 million, principally for the Broadmark acquisition. Financing activities used $3.9 million, including $3.1 million of dividends and $0.8 million for restricted stock withheld for taxes.
- The company had no debt at June 30, 2023 or December 31, 2022. Management believes cash and short-term investments plus operating cash generation will meet ordinary operating and capital requirements for at least the next twelve months, although additional financing could be required.
- Westwood Trust held approximately $7.9 million above its $4.0 million minimum restricted-capital requirement.
Material Changes, Outlook and Risks
The principal structural change was the consolidation of Broadmark. The Salient acquisition continued to affect results through higher advisory revenue, personnel costs, intangible amortization and acquisition-related contingent consideration. The company also exchanged its Charis investment for shares of Vista in April 2023; the exchanged investment had a carrying value of approximately $2.8 million.
No formal quantitative revenue or earnings guidance was provided. Management stated that new products and expanded investment capabilities may create future revenue streams, but there is no assurance that these opportunities will generate material returns. The company declared a quarterly dividend of $0.15 per share on August 2, 2023, payable October 2, 2023.
- Revenue depends on AUM and AUA levels, market values, client flows, investment performance and the ability to maintain fee rates.
- Net client outflows were significant in the Income Opportunity strategy and, year to date, in the Quality AllCap strategy.
- Contingent consideration is a Level 3 liability valued using projections, volatility, discount rates and other unobservable inputs; changes in assumptions could materially affect earnings.
- Other risks include competition, customer concentration, client terminations and redemptions, personnel retention, cybersecurity, regulatory and litigation exposure, acquisitions, activist stockholders, thin trading in the common stock and dividend sustainability.
- Management reported no material changes to previously disclosed risk factors, no legal proceedings, effective disclosure controls and no material changes in internal control over financial reporting.
Investor Verification Points
- Verify the sustainability of revenue growth after adjusting for Salient and Broadmark contributions, market appreciation and performance-based fees.
- Monitor continuing net client outflows and their effect on AUM-based revenue, particularly in the Income Opportunity and Quality AllCap strategies.
- Separate recurring operating performance from the $4.1 million quarterly and $5.1 million year-to-date non-cash contingent-consideration gains.
- Assess whether expense growth, especially compensation, technology and amortization, is moderating relative to revenue growth.
- Reconcile reported cash declines and negative operating cash flow with the company’s liquidity assessment and dividend obligations.
- Review assumptions supporting the $7.8 million contingent-consideration liability and the carrying values of private and equity-method investments.
- Consider the non-GAAP Economic Earnings measure alongside GAAP earnings because it adds back stock-based compensation, intangible amortization and certain tax effects.