Business Context and Reporting Period
Westwood Holdings Group, Inc. is an investment management and trust-services company. Its Advisory and Trust segments generate fees primarily from assets under management (AUM) and assets under advisement (AUA), making results sensitive to market performance, client flows and fee pressures. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the prior-year periods.
At September 30, 2023, firm-wide AUM was $14.4 billion and AUA was $1.1 billion. Westwood completed the acquisition of an additional 32% interest in Broadmark Asset Management in January 2023, increasing ownership to approximately 80% and resulting in consolidation of Broadmark.
Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenue | $21.9 million | $15.4 million | $66.6 million | $48.2 million |
| Net operating income (loss) | $(1.5) million | $(1.1) million | $3.2 million | $(1.1) million |
| Net income (loss) | $4.4 million | $(1.2) million | $8.0 million | $(1.5) million |
| Net income attributable to Westwood | $3.4 million | $(1.2) million | $6.9 million | $(1.5) million |
| Diluted EPS | $0.41 | $(0.15) | $0.86 | $(0.19) |
| Operating margin | (6.6%) | (7.0%) | 4.7% | (2.2%) |
| Net margin | 20.0% | (7.6%) | 12.0% | (3.1%) |
- Q3 asset-based advisory fees increased 61% to $16.9 million; nine-month fees increased 53% to $50.7 million. Nine-month performance-based fees were $0.6 million versus none in the prior year.
- Trust fees declined 2% in Q3 and 7% for the nine-month period, reflecting lower average AUM.
- Total expenses rose 42% in Q3 and 29% for the nine-month period. Employee compensation increased 33% in Q3 and 40% year to date, primarily due to additional personnel from the Salient acquisition.
- Economic Earnings, a non-GAAP measure, were $6.3 million in Q3 and $15.5 million for the nine-month period, compared with $0.8 million and $4.3 million, respectively, in the prior-year periods. Economic EPS was $0.77 in Q3 and $1.92 year to date.
- Cash and cash equivalents were $17.2 million at September 30, 2023, compared with $23.9 million at December 31, 2022. Cash and short-term investments totaled $48.5 million versus $39.2 million at year-end.
- Working capital was $49.7 million, compared with $40.6 million at December 31, 2022. The company had no debt.
- Operating cash flow was $(5.7) million for the nine months, versus $15.3 million provided in the prior-year period. The 2023 outflow included $15.6 million of net purchases of current investments.
- Investing cash flow was $4.1 million, including $5.0 million of life insurance proceeds and $0.7 million of acquisition spending. Financing cash flow was $(5.1) million, including $4.3 million of dividends paid.
Material Changes Versus the Prior Comparable Period
- Revenue growth primarily reflected the 2022 Salient acquisition and the contribution from Broadmark. Broadmark contributed $1.1 million of revenue and $4.0 million of net income in Q3 2023, and $3.4 million of revenue and $4.1 million of net income for the nine months.
- AUM increased 26% to $14.4 billion from $11.5 billion at September 30, 2022. Mutual fund AUM increased 62%, institutional AUM increased 22% and wealth management AUM increased 7%.
- Despite higher AUM, Q3 2023 experienced $0.3 billion of net outflows and $0.3 billion of market depreciation. Nine-month net outflows were $0.9 billion, partly offset by $0.5 billion of market appreciation.
- Q3 net income included $5.0 million of life insurance proceeds, while expenses included a $2.5 million loss from remeasurement of Salient contingent consideration. For the nine-month period, the contingent-consideration remeasurement produced a $2.7 million gain.
- Goodwill increased to $39.5 million from $35.7 million at year-end, primarily due to $4.2 million of Broadmark acquisition goodwill. Management reported no goodwill or intangible-asset impairment.
- The company declared dividends of $0.15 per share per quarter and did not repurchase shares during the quarter. Approximately $1.9 million remained available under the repurchase authorization at September 30, 2023.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management stated that current cash and short-term investments, together with expected 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.
- Revenue remains dependent on AUM and AUA levels, market values, client retention, investment performance and the company’s ability to maintain fee rates.
- Management identified risks related to net client outflows, competition, fee pressure, personnel retention, acquisitions, cybersecurity, information systems, third-party vendors, litigation, regulation, customer concentration and the ability to pay dividends.
- Contingent consideration of $10.2 million remained outstanding at September 30, 2023. Its valuation depends on revenue growth, volatility, discount rates, projected payment dates and other unobservable assumptions, creating potential earnings volatility.
- Westwood Trust was required to maintain $4.0 million of restricted capital and had approximately $11.9 million of excess capital at September 30, 2023.
- The Board declared a $0.15 per-share dividend on October 31, 2023, payable January 3, 2024, to shareholders of record December 1, 2023.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing reported no legal proceedings and no material changes to previously disclosed risk factors.
Investor Verification Checklist
- Verify the sustainability of revenue and earnings excluding the $5.0 million insurance proceeds and the contingent-consideration fair-value adjustments.
- Monitor AUM and AUA trends, particularly continued net outflows in institutional and mutual fund strategies.
- Assess whether Broadmark and the Salient acquisition generate recurring earnings sufficient to offset higher compensation, technology, marketing and amortization costs.
- Review operating cash flow conversion, investment purchases and the company’s ability to fund dividends and contingent consideration without external financing.
- Evaluate the assumptions and sensitivity of the $10.2 million contingent-consideration liability.
- Reconcile non-GAAP Economic Earnings with GAAP results and consider the recurring nature of stock-based compensation and intangible amortization adjustments.