Oppenheimer Holdings Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Oppenheimer provides brokerage, asset management, investment banking, trading and related financial services. At quarter-end, it administered $87.5 billion in client assets and managed $29.5 billion in AUM.
Financial results and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $251.8 million | $234.5 million | +7.4% |
| Income before taxes | $16.1 million | $9.6 million | +66.8% |
| Net income | $11.2 million | $6.7 million | +67.0% |
| Basic / diluted EPS | $0.86 / $0.81 | $0.51 / $0.48 | Higher |
| Operating cash flow | $15.3 million | $(27.5) million | Improved |
- Revenue growth was led by bank deposit sweep income, up 34.3% to $34.0 million; principal transactions, up to $11.4 million from $2.7 million; and other revenue, up to $12.5 million from $5.1 million. Commissions fell 4.8% to $79.4 million and advisory fees fell 5.0% to $73.6 million. Investment banking revenue was nearly unchanged at $28.0 million.
- Total expenses rose 4.8% to $235.7 million. Compensation increased 4.7% to $160.4 million; interest expense increased 44.9% to $13.0 million, and communications and technology costs rose 7.5% to $20.1 million. Compensation was 63.7% of revenue, versus 65.3% a year earlier. Pretax margin was approximately 6.4%, versus 4.1%; net margin was approximately 4.4%, versus 2.9%.
- Private Client revenue increased 6.1% to $163.5 million and pretax income rose 6.7% to $42.8 million. Asset Management revenue declined 6.0% to $16.6 million and pretax income fell 39.7% to $2.2 million. Capital Markets revenue grew 15.3% to $71.0 million; its pretax loss narrowed to $2.6 million from $6.1 million.
- Cash and cash equivalents were $83.1 million at March 31, down from $90.7 million at year-end. Operating cash flow was positive, while financing activities used $19.5 million, including $15.0 million to repay bank call loans, $2.0 million for share repurchases and $1.4 million in dividends. Investing activities used $3.4 million.
- Total assets were $2.53 billion and stockholders’ equity was $554.5 million. The company reported $200 million principal amount of 6.75% senior secured notes due 2022, carried net of issuance costs at $199.2 million; it was in covenant compliance. Operating lease liabilities were $213.0 million, recognized following adoption of the new lease standard in Q1. Bank call loans were zero at quarter-end, versus $15.0 million at December 31, 2018.
- Oppenheimer & Co. reported regulatory net capital of $202.4 million, $187.0 million above its minimum; Freedom had $5.2 million, $5.1 million above its minimum.
Material changes and management commentary
- Management attributed the stronger quarter partly to the equity-market rebound: major U.S. indexes rose 13.1% in Q1 after a 14% decline in Q4 2018. Higher short-term rates supported deposit sweep income, while fixed-income volatility supported trading revenue.
- Q1 advisory fees reflected lower AUM at December 31, 2018 following the prior-quarter market sell-off. AUM rose to $29.5 billion by March 31, 2019, including $0.8 billion of appreciation and $0.5 billion of net contributions; management said this would favorably affect Q2 advisory fees.
- Institutional equities commissions improved with higher activity, while retail transaction-based business declined amid clients’ shift toward passive investing. Investment banking benefited from increased M&A advisory activity, partly offset by lower underwriting, which management linked in part to the U.S. government shutdown.
- The company adopted lease accounting in Q1, recording $171.2 million of right-of-use assets and $213.0 million of lease liabilities. It reported no cumulative-effect adjustment on adoption.
Outlook, risks and contingencies
- No numerical earnings or revenue guidance was provided. Management plans to pursue growth through adviser and asset-management hiring, acquisitions, technology investment and expanded capital-markets capabilities. It expressed optimism about the 2019 investment-banking pipeline, particularly IPOs, and said it remained focused on expense management.
- Legal and regulatory matters where loss is reasonably possible were estimated to involve aggregate additional losses of $0 to approximately $21.0 million above amounts accrued; some matters could not be reasonably estimated. Actual losses could exceed the estimate.
- In March 2019, the SEC ordered Oppenheimer and Oppenheimer Asset Management to disgorge approximately $3.5 million, including prejudgment interest, relating to mutual-fund share-class disclosures and 12b-1 fees, and imposed remediation, client-notification and compliance undertakings. The filing text does not clearly state whether the amount had been paid or how it was reflected in Q1 results.
- Auction-rate securities remain a contingent exposure. The company held approximately $40.7 million of ARS, had $7.4 million of legal-settlement purchase commitments through 2020, and eligible investors held approximately $7.0 million potentially subject to future offers. The company said the timing and amount of future purchases and potential losses could not be reliably estimated.
- Other disclosed risks include securities-market and interest-rate volatility, funding availability and cost, credit exposures, cybersecurity, litigation and regulation, MiFID II, and uncertainty over Brexit and the company’s ability to serve EU clients from its London business. Management said liquidity resources and available facilities were sufficient for foreseeable needs, while noting external financing availability could depend on market conditions.
- The company reported that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the $3.5 million SEC disgorgement and associated remediation costs were accrued, paid, or otherwise reflected in reported results.
- How Q2 advisory-fee growth developed following the rise in quarter-end AUM, and whether asset appreciation and net contributions continued.
- Whether growth in sweep income and trading revenue is sustainable, given its sensitivity to interest rates, market activity and volatility.
- Developments in legal and regulatory matters, particularly the estimated $0–$21.0 million additional-loss range and the unresolved ARS exposure.
- Liquidity and funding needs alongside repo activity, securities lending, lease obligations, and the $200 million notes due 2022; assess these in light of the company’s broker-dealer capital requirements.