Moelis & Co

NYSE:MC

Earnings Call Analysis

Moelis & Company's Steeled for Growth with High Pipeline

Moelis & Company disclosed a 6% year-over-year revenue increase for Q4 2023, despite a full-year decline of 11%. The dip was attributed to lower M&A fees, partially offset by gains in restructuring and capital markets fees. Their pipeline is bustling, near-record levels indicate a strong start and optimism for a turnaround in M&A activities. The firm maintains a regular quarterly dividend of $0.60 per share and foresees a potential pre-tax margin of 25% or better, confident about the future with strategic positioning for market uplift. Moreover, an aggressive capital return policy reassures shareholder commitment.

Revenue Performance and Financial Highlights

Moelis & Company's revenue for the fourth quarter stood at $215 million, marking a 6% increase from the previous year. However, the total revenue for the full year was down by 11%, coming in at $860 million. The dip was predominantly due to a decline in the fees from M&A activities, which was somewhat mitigated by a rise in restructuring and capital markets fees.

Expense Ratios and Earnings Per Share

For compensation expenses, the ratio for the full year was slightly under 83%. Investors should be aware that due to retirement-eligible awards, the first quarter compensation ratio is expected to be higher. Furthermore, the non-compensation expense ratio was about 21%, with baseline non-compensation expenses projected to be between $45 million to $46 million, excluding transaction-related expenses. There's a notable factor for the earnings per share (EPS): for every $1 difference between the vesting price and the adjusted grant price of equity, there will be an approximate $0.01 impact on EPS.

Dividend and Balance Sheet Strength

The Board declared a consistent quarterly dividend of $0.60 per share, which remains unchanged from the previous period. The firm boasts a robust balance sheet with $349 million in cash and no indebtedness, positioning it well in terms of financial stability.

Strategic Personnel Growth

Even in a challenging climate, Moelis & Company focused on growing its business by hiring 24 new and promoting 8 existing Managing Directors, with an emphasis on significant global fee pools such as technology, industrials, and clean technology. Overall, the company's MD headcount expanded by about 20% over the year, while the total employee headcount increased by just under 5%, showing a strategic focus on lean and effective management. This growth in expertise is reflected in early 2024 promotions of 7 bankers to MD and hiring 3, with additional hires to boost coverage in credit funds and upstream energy.

Outlook on M&A and Business Sentiment

While the M&A environment was challenging in 2023, the company feels it has navigated through the toughest phase and is well-prepared for the expected upswing. Federal Reserve's signals towards probable rate cuts have been interpreted as an encouraging sign for an increase in M&A activities. An early indication of optimism is the current pipeline level, which is close to record highs. The company anticipates some recovery in the M&A sector, further propelled by the firm's expanded expertise and anticipation of rate cuts.

Restructuring Business Prospective Growth

Despite the hurdles faced in 2023, Moelis & Company noticed building mandates, indicating potential revenue acceleration in 2024. The firm expects an uptick in the restructuring area of the business. However, the trajectory of this growth could be impacted by Federal Reserve rate changes, which can affect market liquidity and may shift the demand for restructuring services.

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon, and welcome to the Moelis & Company Earnings Conference Call for the Fourth Quarter and 2023. To begin, I'd like to turn the call over to Matt Tsukroff.

[Matthew Tsukroff, executive]

Good afternoon, and thank you for joining us for Moelis & Company's Fourth Quarter and Full Year 2023 Financial Results Conference Call. On the phone today are Ken Moelis, Chairman and CEO; and Joe Simon, Chief Financial Officer. .

Before we begin, I would like to note that the remarks made on this call may contain certain forward-looking statements which are subject to various risks and uncertainties, including those identified from time to time in the Risk Factors section of Moelis & Company's filings with the SEC.

Actual results could differ materially from those currently anticipated. The firm undertakes no obligation to update any forward-looking statements. Our comments today include references to certain adjusted financial measures. We believe these measures, when presented together with comparable GAAP measures, are useful to investors to compare our results across several periods and to better understand our operating results. The reconciliation of these adjusted financial measures with the relevant GAAP financial information and other information required by Reg G is provided in the firm's earnings release, which can be found on our Investor Relations website at investors.moelis.com.

I will now turn the call over to Joe to discuss our results.

[Joseph Simon, executive]

Thanks, Matt. Good afternoon, everyone. On today's call, I'll go through our financial results, and then Ken will comment further on the business. We reported $215 million of revenues in the fourth quarter an increase of 6% versus the prior year period. For the full year, our adjusted revenues of $860 million were down 11%. The revenue declines were driven by a decrease in fees earned from M&A partially offset by an increase in restructuring and capital markets fees.

Regarding expenses, our full year compensation expense ratio is a little less than 83%. As a reminder, our first quarter compensation ratio will likely be elevated as a result of retirement eligible awards, which are expensed at the time of grant.

For the full year, we reported a non-compensation ratio of approximately 21% and as a result of our MD head count expansion, underlying noncomp expenses will be in the $45 million to $46 million range beginning in the first quarter, excluding transaction-related expenses. As many of you know, the annual vesting of RSUs will occur later this month. For purposes of quantifying the excess tax benefit, we expect the impact to EPS to be approximately $0.01 for each $1 difference between the vesting price and adjusted grant price of $39 a share.

Regarding capital allocation, the Board declared a regular quarterly dividend of $0.60 per share consistent with the prior period. And lastly, we continue to maintain a strong balance sheet with $349 million of cash and no debt. I'll now turn the call over to Ken.

[Kenneth Moelis, executive]

Thanks, Joe. Good afternoon, everyone. While 2023 was a challenging year, we played strong offense and aggressively expanded our business. During the year, we hired 24 and promoted 8 Managing Directors. Many of these new MDs are focused on the most significant global fee pools, including technology, industrials and our Clean Technology Group. .

While we expanded our new MD population by approximately 20% during the year, our total employee head count grew just under 5% as we actively managed our head count. In early 2024, we promoted 7 bankers to MD and have hired 3. One hire enhances the firm's coverage of credit funds and 2 Managing Directors will join in the coming weeks are focused on upstream energy. While we will selectively add talent in areas where we see meaningful key pool opportunities, this year, we expect to be primarily focused on delivering our expanded expertise to our clients. It's difficult to predict when the M&A environment will fully rebound. However, the Fed's messaging has eliminated the tail risk of future rate hikes and brought in to view a high probability of rate cuts in the coming year. which I believe will give rise to an increase in M&A activity.

We're seeing early signs of an improvement in sentiment as expressed in our pipeline, which is near record levels at the beginning of the year. Barring unforeseen events, I'm confident that we have seen the bottom of this M&A cycle and that we have positioned the firm well for the coming uplift. With that, I'll open it up for questions.

[Operator]

Thank you, Mr. Moelis. Ladies and gentlemen, [Operator Instructions] Our first question is from the line of Devin Ryan with JMP Securities.

[Devin Ryan, analyst]

Ken and Joe. I guess I just want to start on the sponsor backdrop. Clearly, very challenging market in 2023. I think sponsors have their slowest year of announcements since 2013. So just wanted to get your thoughts on what do you think a recovery for sponsors could look like? Do you think it's going to be a slow build? Do you see it snapping back? And just really how you see it developing maybe in the next 2 years relate to 2023? And I appreciate you're now in some sectors like technology in a bigger way as well, so potentially get a bigger snap back. I'd just love to get some thoughts there.

[Kenneth Moelis, executive]

I think it will be somewhere in between and depending -- again, I think rate cuts when they happen will trigger a ramp-up in whatever speed you're asking me to handicap. And I think the actual event of a rate cut and the beginning of that will provide a tailwind. But again, Devin, I'll take you back. I think the world changes so fast these days. I think sometimes we forget that within the last 4 or 5 months, we literally had the head of CEO of one of the major banks in the country, telling the community that nobody is ready for a 7% federal funds rate, and they have to be ready for it. It's a possibility. We had one of the largest and most vocal hedge funds short the 30-year treasury. This was in October, I think early October, and saying that the theory was treasury had to print so much paper and there was no way rates were going in the opposite direction.

And today, there is none of that conversation. It is all about how low -- how quickly and how fast we go the other direction, almost nobody is talking about the tail risk of high rates. And I do think that will promote deal activity very rapidly. I don't think the difference between March or June or May or when rate cuts actually happen will have less impact than the fact that I believe the vast majority of the community believes they will happen. And what we won't face is a 7% Fed funds rate that could destroy a deal that you entered into in the back half of last year.

So I think it will start -- we see it right now. It is building I think most people are trying to use their best judgment as to when exactly to hit this market. And again, the private equity community is much more sensitive to timing their entrants and their exit into M&A, that strategics are who are mostly investing for the long term.

So look, I think the long answer, but I think we will start to build from here gradually and then I think it was -- I forgot the famous one has said, we'll go gradually and then rapidly. I think that was in relation to bankruptcy, so I shouldn't use that analogy. But I forgot who said first, we'll start out gradually, and then it will move rapidly.

[Devin Ryan, analyst]

Yes. I understand. And just a follow-up on the other business and restructuring. Obviously, some optimism around, I think, the resilience and restructuring in that through or earnings calls, you guys noted a year-over-year increase in the press release in that business. And so obviously, 2023 had pockets of strength, but it felt like the mandates were building. And so therefore, there should be some acceleration in revenues in 2024.

So I just -- I guess I want to trying to get a sense of how you're thinking about the trajectory of restructuring. And then perhaps your comment on M&A as the Fed starts cutting how that could accelerate M&A maybe more than people think. Do you think that the Fed cutting could actually surprise people on kind of the falloff in restructuring just as kind of conditions loosen it's a better environment or do you just think that the maturity walls and just a high absolute level of rates is the biggest driver. So I just want to drill in there a little bit.

[Kenneth Moelis, executive]

Going into the year, we have -- we think restructuring will be up. And because of the size and the scope and how long and the impact of interest rates, higher interest rates on a long period of time. But look, if the Fed were to cut and begin to cut aggressively, I do think that, that would it cuts off a part of the restructuring market. Look, that's why we built up capital markets so strongly. Most restructurings in this market are very close to being financing. It's a matter of liquidity in the market terms, outlook on financials, but there is nobody who -- in the market who wouldn't rather do a financing than a liability management exercise or restructuring.

So yes, the speed and the aggressiveness with which the Fed addresses the market would definitely change the outlook for restructuring I still think it will be -- there's a fundamental amount of companies that are under pressure -- interest rate pressure. But I think it would do a lot to damage the maturity wall if the Fed actually began a whole series of things like right now, we have a quantitative tightening. So they can do a bunch of things that would just make credit available and push out a lot of that wall.

[Operator]

Our next question comes from the line of Ken Worthington with JPMorgan.

[Kenneth Worthington, analyst]

Maybe for Joe, I wanted to dig into the compensation ratio and how Moelis' compensation could react to different environments. So Moelis generated about $860 million of revenue last year, a compensation of $711 million how clean is that $711 million ? So you did a lot of hiring throughout the year. If you generated $860 million of revenue, again, I guess maybe first, what does comp look like in that environment for '24 and if the environment improves and revenue goes higher, how much of the incremental revenue actually gets paid out in compensation from here? So if you make another $1 million of revenue, how much goes to employees? How much goes to investor?

[Kenneth Moelis, executive]

Joe, I think you've been doing some work around that. So I'll let you deal with that.

[Joseph Simon, executive]

Yes. So the -- I think the best way to think about it is, I'd say, for every $100 million increase in revenue from the $860 million starting point, we're looking at kind of 4 to 5 points of comp leverage. So in other words, if we go from $860 million to $960 million, I would imagine that 83 would turn into 78 to 79, and that progression would just happen along that route until we got to kind of 60 area -- at which point I don't think it goes much -- it doesn't go beyond that.

[Kenneth Worthington, analyst]

Okay. Great. Perfect. And then just again, another simple one for you, Joe. On the balance sheet, what was the compensation payable at the end of the year? And then how much of that payable is satisfied in cash?

[Joseph Simon, executive]

Well, the compensation payable is satisfied in cash. I don't have that balance at my fingertips, but that will be in the K in the next couple of weeks. .

[Operator]

Our next question is from the line of Brennan Hawken with UBS.

[Brennan Hawken, analyst]

Would love to hear -- you touched on this a little bit in the prepared remarks in giving a little texture about restructuring. But is it possible to get the breakdown of advisory revenue for 2023 and the fourth quarter as far as restructuring and capital markets and how much that represented? .

[Kenneth Moelis, executive]

I think if I -- I'm thinking as a full year, I think, Brennan, that it's been in the mid-third. Well, let me say this. We tend to think of capital markets and restructuring as a -- we put them together because I think, as I said, if you can move a restructuring into a capital markets, you haven't failed, you've succeeded for your client, and that is really the goal. Just to refinance debt and move it out I think restructuring has been in the mid-20s, and I think combined, they've been in the mid-30s. And I believe that might be an annual number, though.

[Joseph Simon, executive]

Yes, a little higher than the mid-30s, but that's directionally right.

[Brennan Hawken, analyst]

Mid-30s in 2023?

[Joseph Simon, executive]

Yes. It on 2 combined. So 25% area for restructuring, 10%, maybe 12% on the capital markets side combined -- kind of 35% to 37%.

[Brennan Hawken, analyst]

Got it. Okay. Great. And Joe, in your comment on the comp leverage, which is helpful texture. You indicated that you bring it down to $60 and then stay there. Ken, when you went public, the general idea was that long-term target for comp was 57% to 58%. Is that now adjusting and now the new general standard or normalized level is more like a 60 number? Or is it that in -- for the next few years given the quantum of recruiting you've done, it's just going to be a little more elevated and it might take longer to get down to that high 50s.

[Kenneth Moelis, executive]

Now I think what Joe said that it was our feeling and we'll see what happens, Brennan. But there's been fairly large inflation in the non-managing director base go-to-market -- base run the company Vice Presidents associates. So I think our view is that might have eaten up a point or 2 of your overall ability on comp ratio. .

But again, we're -- we still think we manage to a pretax margin that is 25% or better. That's what we're really aiming for. But we'll see what the competitive environment is and what's out there, but I will tell you that we -- there was significant inflation in those ranks. And as inflation is hard to get -- it doesn't come back quickly.

[Operator]

[Operator Instructions] Our next question is from the line of James Yaro with Goldman Sachs.

[James Yaro, analyst]

Ken and Joe, maybe just turning to the senior banker base quickly. I think your net MDs were actually down by 4 sequentially -- maybe you could just talk about what drove the sequential step down? And then you noted 3 hires year-to-date. And -- but I think you also commented that it's more about bringing your existing capabilities to clients. So maybe you could just help us understand the hiring backdrop is for 2024? I assume it will be substantially slower than in 2023?

[Kenneth Moelis, executive]

I thought -- I'm surprised that our net MDs are down. I don't have it right in front of me because...

[Joseph Simon, executive]

It's actually, Ken, this is all about -- there were a number of folks who were leaving -- some of the actions took place in the first half they leave in the second half. And so the net change in the -- between the third quarter and the fourth quarter, was slightly down.

[Kenneth Moelis, executive]

Okay. Sorry, I thought it was -- I thought you were doing year-over-year, sorry, quarter-over-quarter sorry -- that does make sense. So look, we spent a year and we -- we did it quietly, but we aggressively hired and we aggressively managed. I think a lot of people were talking about managing their head count we were doing it. I didn't see any reason to be extremely chest pounding about it. We just did it. So we did -- there was a substantial change. You were talking about the hires for the new year in 2024. Two of those are upstream oil and gas, which I think will continue to be a significant market, lots of activity. We're very happy about that team, which is a place we have not played much. And then this credit fund person, again, this goes to the rise of private credit both as a supplier to deals, a generator of deals and possibly restructuring in the future.

So we thought a dedicated coverage of that environment given its growth I think this is the first time we'll actually have a dedicated banking coverage of private credit. For the rest of 2024, we'll be opportunistic. Look, there's always places that we are going to be higher. We might have levers, so we might have to respond to that. But -- and there are also places where we would like to expand if the right situation happened. But I do think given what we did in 2023, this is the year we should deliver this expertise and focus on the client and get out there and show you what we've done. I think we've done a great job of expanding the expertise we have. I think we've addressed some markets that we had a difficult time like technology, finding the right moment and the right method to build our expertise. And I think this is the year that we're going to focus on that, delivering these services to the client.

[James Yaro, analyst]

Okay. That's very clear. So you did build another roughly $50 million of cash and short-term investments this quarter. So I'm going to ask a question that's quite different than what just one or two quarters ago. But what is the level of earnings or perhaps what you need to see in the macro backdrop that would promise you to consider increasing capital return, especially in terms of the buyback.

[Kenneth Moelis, executive]

That's -- that's the first time I've been asked that question in 24 months. That's an exciting question to be asked. So look, we -- again, we haven't spent much time on that given the market we're in. But I think given our history, you've seen as soon as we get above a certain level of cash and a market that we're comfortable with, we will return the capital. We've done it aggressively in the past. I don't have an exact -- I suspect again, 3 to 5 months post the first rate cut in my mind is when I think we'll be at a run rate of 25% pretax. I think Again, this calendar year is very difficult because you have a tale of 2 markets. You have the market that I was talking about, the deals that were trying to be created into that environment of people saying that there's a 7% Fed funds possible.

But as of now, we don't have that and then when it kicks in. And I think it's a good question. We haven't spend a lot of time worrying about how high is up and what we'll do with the capital. But I can guarantee you, we'll return it to the shareholders as soon as we're comfortable that it excess.

[Operator]

Our next question is from the line of Steven Chubak with Wolfe Research.

[Steven Chubak, analyst]

I guess echoing Brennan's comments on the comp leverage sensitivity, Joe, that disclosure is really helpful One of the pieces I was hoping to unpack is whether we should be contemplating that 400 basis point improvement. If we can underwrite that in a linear fashion, which would suggest the path to low 60s might require revenue generation across the franchise, somewhere in the range of about $1.3 billion to $1.4 billion.

[Joseph Simon, executive]

I think that might be -- yes, that sounds maybe a little high, but reasonable.

[Steven Chubak, analyst]

You believe you can get there with a lower revenue level.

[Kenneth Moelis, executive]

I think we can get there, yes, I don't know that are...

[Joseph Simon, executive]

It's probably reasonable.

[Kenneth Moelis, executive]

Yes. I think remember, some of our compensation does not fluctuate as linearly. So I think you're in the ballpark, but I thought you were a little high myself, too.

[Steven Chubak, analyst]

Okay. Fair enough. The other piece is just on MD productivity normalization. And Ken, in the past, you've talked about various normalized productivity ranges. But just given a different composition of MDs, the significant hiring you've done this past year, what level of productivity do you believe is sustainable in a more normal operating backdrop?

[Kenneth Moelis, executive]

Look, I agree with you. I think we have a better -- let's just say, I think we've improved our MD and the pools in which they face. I mean we had we're not facing technology in a size that was -- that matched every other place that we were facing off against the fee pools. And with the Silicon Valley Bank deal, we changed that pretty dramatically. -- same with oil and gas right now, industrials, I think we've addressed some of the largest fee pools in the market.

So I think we'll be more productive per MD. And then again, we haven't had what you would call a normal year in a long time in M&A. And so again, I just look at the -- I kind of look at the last 3 years and say, if you kind of average them we had an incredible spike in 2021 and then we had, I'd say, '22 was less than optimal and '23 was well below optimal. But you ought to put those together and do your average productivity off of that, I think should be above that. And I think, again, we haven't had what I'd call a normal year in 3 years.

So I don't know exactly what normal will be in the productivity. But I would -- again, those 3 years kind of put together, divide by 3 might be a good way to think about it. It's helpful context. Now I guess it's time to choose my own adventure, but I appreciate the color.

[Operator]

Our next question is from the line of Ryan Kenny with Morgan Stanley.

[Connell Schmitz, analyst]

This is actually Connell Schmitz filling in for Ryan Kenny First question on the comp leverage. Just another detail there would be one level of MD hiring and overall head count are you assuming in that 4% to 5% comp leverage per $100 million incremental revenues?

[Joseph Simon, executive]

Yes. I mean it's kind of reverting back to a more normal pace than what we've seen in the last 2 years on the hiring front.

[Connell Schmitz, analyst]

Got it. And then as it relates to [indiscernible], like this quarter in particular, any comments on how that affected the income statement as it relates to revs and noncomp -- and then you go forward on noncomp.

[Kenneth Moelis, executive]

Are you asking about Silicon Valley Bank? Is that what?

[Connell Schmitz, analyst]

Yes.

[Joseph Simon, executive]

We don't break out any of that.

[Kenneth Moelis, executive]

Yes, I'm not going to break it out. I'll just say that it's been -- we think it's been very successful. And the group has gotten off the ground and the fact that it was a group, the fact that there wasn't a lot of downtime. They weren't on the beach for a long time. Again, it was not a great year, and the fourth quarter wasn't the -- you don't want to hold people to the fourth quarter, but we felt very good about the group and their ability to produce.

[Connell Schmitz, analyst]

I guess, said another way, should we expect an incremental drop off in noncomp as the transaction sharing agreement rolls off?

[Joseph Simon, executive]

Well, again, what I described as pre-transaction was like the 45 area, and that would exclude anything on the SVB fee arrangement, that ends this quarter. So it shouldn't be material beyond this quarter if it's even material this quarter actually.

[Operator]

We have a final question for today. follow-up call from the line of Brennan Hawken with UBS.

[Brennan Hawken, analyst]

I just wanted to try to drill down a little bit on the MD count because there's a few numbers around and it's a little confusing. You touched on it to some degree before prior question. But -- so the investor presentation says year-end MDs of $157 million for the press release, you've added 10 MDs, 7 promotions. And then the press release also shows $160 million as of now. So does the $160 million include the 2 that have committed to join in the coming weeks? And was there in addition to there being some folks departing right around year-end, where there are also some folks departing early in the year or was that something else?

[Joseph Simon, executive]

So it's $160 million today. That excludes the 2 that haven't arrived yet. -- and $157 million refers to as of year-end. And as far as like -- if you need like a whole reconciliation, let's do that offline.

[Operator]

We actually do have 1 final question that just came in. This is coming from the line of Mike Brown from KBW.

[Michael Brown, analyst]

Great. Most have been asked, but I guess I just wanted to maybe get a little bit more color on the kind of shadow backlog or your pipeline, the visibility that you guys have. So kind of understanding that it sounds like it's -- it will take a little time for the broad-based recovery and M&A to take form. But can you just maybe give us a quick update on what you are seeing behind the scenes. I think you sounds good quite bullish 2 months ago or so when you characterize that pipeline. So just interested to hear how that has evolved since.

[Kenneth Moelis, executive]

Yes. I said earlier in the call that our actual pipeline is right near all-time highs. And what's really -- again, I -- the end of the year last year between when the Fed was late November kind of put out the -- this idea that you take rate hikes off the table and just start guessing when rate cuts will begin. I think that was why I was bullish. I just felt like -- that's a statement that is very valuable to anybody in the deal business that you can eliminate the tail risk of a raise. But you do go into Christmas season. I feel like when we gotten back to work in January, our new business review, which is where we actually determine whether we're going to take on business, almost pre pipe has been extremely active.

So pipe is high, new business review has been quality and busy. Quality deals feels like much realer, so I think it's happening right in front of us now. I think the buildup in M&A is beginning. What I do think you're going to see here a little bit is private equity that it's very -- they're very sensitive to when they enter and when they exit and try to maximize much more than a strategic will be.

So I do think you're going to find a little bit of institutions trying to attempt to time this thing exactly right. But it feels like everybody -- not everybody, a lot of people are stepping up to the to the starting line and getting ready to move. That's the way it feels right now. There is a large amount of transactions that are getting positioned to move. And since I don't think the next move as a rate hike. I just think that means it's a question of when they move and not if they move.

[Operator]

Ladies and gentlemen, that will close our Q&A session here for today. Mr. Moelis, I'd like to turn it back over to you with any closing comments.

[Kenneth Moelis, executive]

Well, I appreciate everybody's time, and we'll see you on the next call. Thank you. .

[Operator]

Thank you. Ladies and gentlemen, this will conclude today's mall listen Company conference call. Have a great day. We'll see you next time.