Perella Weinberg Partners — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. PWP is a global independent advisory firm operating through an Up-C structure; the filing reports one operating and reportable segment. Figures below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $139.0 | $145.4 | $436.0 | $448.4 |
| Operating income (loss) | $(26.7) | $(8.8) | $(71.1) | $(28.2) |
| Operating margin | (19.2)% | (6.1)% | (16.3)% | (6.3)% |
| Consolidated net income (loss) | $(23.7) | $(12.9) | $(69.4) | $(9.1) |
| Net income (loss) attributable to PWP | $(2.0) | $1.1 | $(6.8) | $19.3 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $(12.5) | $(98.7) |
- Q3 revenue declined 4% year over year; nine-month revenue declined 3%. Management attributed the decreases mainly to lower financing and capital solutions fees, including large prior-year fees; M&A activity was slightly higher.
- Total operating expenses rose 7% in Q3 and 6% year to date, exceeding revenue. Total compensation and benefits, including equity-based compensation, were 92% of Q3 revenue and 90% of nine-month revenue, versus 85% and 84% in the comparable 2022 periods.
- Basic/diluted loss per Class A share was $(0.05)/$(0.27) in Q3 and $(0.16)/$(0.84) for nine months. The diluted calculation reflects assumed exchanges of PWP OpCo units.
Liquidity, debt and capital
- At September 30, cash was $126.6 million, restricted cash $2.6 million and short-term U.S. Treasury securities $70.0 million. Combined cash, restricted cash and securities were $199.2 million, down $115.1 million from year-end 2022.
- Nine-month operating cash outflow was $12.5 million, investing cash inflow $26.3 million and financing cash outflow $60.0 million. Operating cash flow reflected, in significant part, payment of prior-year annual bonuses; investing activity included Treasury maturities and $45.5 million of fixed-asset purchases.
- PWP had no outstanding debt and had a $50 million revolving credit facility, with up to $20 million of additional commitments available; none was drawn. Management believes available liquidity and operating cash generation will cover operating needs and commitments for the next 12 months, while noting it may seek financing if sources prove insufficient.
- Lease liabilities were $175.3 million; the tax receivable agreement liability was $28.8 million. The company estimates about $12 million of net spending to complete the New York office construction.
- The $200 million share-repurchase authorization had $108.8 million remaining at September 30. PWP repurchased $22.5 million of shares during the first nine months, but none in Q3. The board declared a $0.07-per-share dividend on November 1, payable December 8, 2023.
Material changes, outlook and risks
- Business realignment: Employee reductions began in Q2 to improve compensation alignment and provide flexibility for strategic opportunities. Related Q3 and nine-month expenses were $6.4 million and $11.5 million. Management expected about $18 million of additional expense during the rest of 2023 and estimated $16 million of related cash payments remained, expected within 12 months.
- Equity compensation: Nine-month equity-based compensation expense was $132.8 million, up 16%. Unrecognized compensation expense was $322.2 million, expected to be recognized over a weighted-average 2.3 years. A Q3 award modification is expected to add $10.2 million of compensation cost over the remaining service period.
- SEC settlement: In connection with self-reported recordkeeping practices involving off-channel messaging applications, PWP LP and two related entities agreed to pay the SEC $2.5 million jointly and severally. PWP recognized a $1.25 million charge.
- Market and revenue risks: Management described the advisory environment as challenging, although client dialogues were becoming more active. Engagements are non-exclusive and transaction-related fees may be delayed, reduced or not earned if transactions fail to close. No quantitative revenue or earnings guidance was provided.
- Client concentration: One client accounted for $34.1 million, or more than 10%, of Q3 revenue. A single client also represented $34.1 million of gross receivables exceeding 10%; PWP reported that this amount was subsequently collected.
- Litigation: In long-running litigation involving former employees and Ducera Partners, the court upheld the enforceability of PWP’s restrictive covenants but otherwise denied PWP’s summary-judgment motion; defendants’ motion was denied. Defendants appealed and seek at least $60 million in damages. Management considers its claims and defenses meritorious and does not believe current proceedings are probable or reasonably possible to have a material adverse effect, but states outcomes remain uncertain.
- Management reported no material changes to previously disclosed risk factors. Key exposures include volatile, transaction-dependent fees; retaining and recruiting key personnel; regulation, conflicts, litigation and cybersecurity; foreign-exchange movements; and cash balances exceeding deposit-insurance limits. Regulated subsidiaries exceeded minimum capital requirements, though some capital is restricted.
Important facts for investors to verify
- Whether advisory activity and completed transactions improve enough to support revenue recovery, particularly in financing and capital solutions.
- How realignment costs, compensation levels and elevated equity-based compensation affect future expenses and cash needs.
- Liquidity trends after bonus payments, office construction spending, repurchases, dividends and partner distributions; also confirm availability and terms of the undrawn credit facility.
- Developments in the SEC settlement and the appeal and potential exposure in the Ducera litigation.
- Client concentration and collection patterns, and the scale and timing of lease and tax receivable agreement obligations.