Moelis (NYSE:MC) & Company (ticker: MC), a global investment bank, announced its fourth-quarter earnings with a 6% revenue increase to $215 million compared to the previous year. However, the firm experienced an 11% drop in full-year adjusted revenues, primarily due to a decrease in M&A fees. Despite this, the company remains optimistic about the future, with expectations of increased M&A activity following potential Federal Reserve rate cuts. The firm also boasts a strong financial position with $349 million in cash and no debt.
Key Takeaways
- Q4 revenues rose to $215 million, a 6% year-over-year increase.
- Full-year adjusted revenues fell by 11% to $860 million, mainly due to lower M&A fees.
- Compensation expense ratio remained under 83% for the year.
- Non-compensation expenses are projected to be between $45 million and $46 million in Q1 2024.
- 24 new managing directors were hired in 2023, with promotions given to eight, focusing on technology, industrials, and clean technology sectors.
- A strong balance sheet was reported with $349 million in cash and no outstanding debt.
Company Outlook
- Anticipation of increased M&A activity with the potential for rate cuts by the Federal Reserve.
- Plans to focus on client service delivery and expanding market expertise in 2024.
- Consideration of increased capital return to shareholders once excess cash levels are comfortable.
Bearish Highlights
- Full-year adjusted revenues saw a decline due to reduced M&A fees.
- A net decrease in managing directors was observed due to some departures.
Bullish Highlights
- The firm's strong deal pipeline is at an all-time high, signaling robust future activity.
- The company's financial position is solid, with significant cash reserves and no debt.
- Aggressive hiring and promotion of managing directors to bolster expertise.
Misses
- Specific impacts of the Silicon Valley Bank deal on the income statement were not disclosed.
- The exact count of managing directors was not provided.
Q&A Highlights
- Productivity per managing director is expected to improve due to better composition and increased expertise.
- The compensation ratio is projected to stabilize around 60 in the future.
- Non-compensation expenses may decrease after the end of the transaction sharing agreement with Silicon Valley Bank.
- The firm did not provide specific details about the performance of Silicon Valley Bank or the transaction sharing agreement.
During the earnings call, CEO Ken Moelis expressed confidence in the company's deal pipeline, attributing its strength to the Federal Reserve's late November announcement that rate hikes were off the table. This reduction in risk has led to a buildup in M&A activity. Despite the possibility of private equity firms timing their market moves, there is a general readiness among players to engage in transactions. Moelis & Company's outlook remains positive, with a focus on leveraging its strong financial position and expertise to navigate the evolving market landscape.
InvestingPro Insights
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InvestingPro Tips indicate that analysts have recently revised their earnings expectations downwards for the upcoming period, suggesting a cautious outlook on the company's near-term profitability. This aligns with the firm's own report of decreased M&A fees impacting revenues. Additionally, the company is trading at a high earnings multiple, with an adjusted P/E ratio of 2515.85 for the same period, which may highlight investor confidence in its future growth despite current challenges.
Investors should note that Moelis & Company has maintained dividend payments for 10 consecutive years, a testament to its commitment to shareholder returns. The current Dividend Yield stands at 4.39%, a significant figure for income-focused investors. Moreover, the company's stock has seen a robust return over the last three months, with a price total return of 31.21%, suggesting a strong short-term performance that could interest potential investors.
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Full transcript - Moelis & Co (MC) Q4 2023:
Operator: Good afternoon and welcome to the Moelis & Company Earnings Conference Call for the Fourth Quarter in 2023. To begin, I'd like to turn the call over to Matt Tsukroff
Matt Tsukroff: 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'll now turn the call over to Joe to discuss our results.
Joe Simon: 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%. As a result of our MD headcount expansion, underlying non-comp expenses will be in the $45 million to $46 million range, beginning in the first quarter, excluding transaction-related expenses. As many of 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 60 cents 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.
Ken Moelis: 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 eight 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 headcount grew just under 5% as we actively managed our headcount. In early 2024, we promoted seven bankers to MD and have hired three. One hire enhances the firm's coverage of credit funds, and two managing directors we'll join in the coming weeks are focused on upstream energy. While we will selectively add talent in areas where we see meaningful fee 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 into 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. [Operator Instructions]. Our first question is from the line of Devin Ryan with JMP Securities. Your line is live.
Devin Ryan: Great. Good evening, Ken and Joe. I guess I just want to start on the sponsor backdrop. Clearly, a very challenging market in 2023. I think sponsors had their slowest year of announcements since 2013. So, just want 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 two years relative to 2023. I can appreciate you're now in some sectors like technology in a bigger way as well, so potentially get a bigger snapback. But just love to get some thoughts there. Thank you.
Ken Moelis: I think it'll 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 four or five months, we literally had the head of CEO of one of the major banks in the country telling the community that nobody's 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 the opposite direction. And today, there is none of that conversation. It is all about how quickly and how fast we go the other direction. Almost nobody's 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 a March or a June or a May or a -- 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 that 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 entrance and their exit into M&A than strategics are who are mostly investing for the long term. So look, I think -- long answer, but I think we will start to build from here gradually. And then I think it was -- I forgot the famous one that said we will 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 will start out gradually and then it will move rapidly.
Devin Ryan: Yep. I fully understand. Thank you. And just to follow up on the other business and restructuring, yeah, obviously some optimism around I think the resilience and restructuring and hearing that through numerous 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 want to kind of 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 fall-off in restructuring just as kind of conditions loosen and 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. Thank you.
Ken Moelis: 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 financings. 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 would 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 quantitative tightening. So they could do a bunch of things that would just make credit available and push out a lot of that wall.
Devin Ryan: Yeah, I understand. OK, thanks, Ken. I'll leave it there.
Operator: Thanks for your questions. Our next question comes from the line of Ken Worthington with JP Morgan. Your line is live.
Ken Worthington: Hi, good afternoon. Thanks for taking the question. Maybe for Joe, I wanted to dig into the compensation ratio and how most of this compensation could react to different environments. So most 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 dollars of revenue again, I guess maybe first, what does comp look like in that in that environment for 24? And if 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 million dollars of revenue, how much goes to employees? How much goes to investors?
Ken Moelis: Joe, I think you've been doing some work around that. So let you deal with it.
Joe Simon: 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 four to five 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 along that route until we got to kind of 60 areas, at which point I don't think it goes much around. It doesn't go beyond that.
Ken Worthington: OK, great. Perfect. Thank you. 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?
Joe Simon: Well, the compensation payable is satisfied in cash. I don't have that balance at my fingertips, but that'll be in the K in the next couple of weeks.
Operator: Our next question is from the line of Brennan Hawking with UBS. Your line is live.
Brennan Hawking: Good evening. Thanks for taking my questions. Would love to hear you touched on this a little bit in the prepared marks 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?
Ken Moelis: I think if I'm thinking of a full year, I think, Brandon, that it's been in the mid 30s. 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.
Joe Simon: Yes, a little higher than the mid 30s. But that's, directionally right.
Brennan Hawking: Mid 30s in 2023?
Joe Simon: Yes, it's combined. Those two combined. So, 25 areas for restructuring, 10%, maybe 12% on the capital market side combined kind of 35 to 37.
Brennan Hawking: Got it. OK, great. Thanks so much for that. And, Joe, in your comment on the comp leverage, which was which was helpful texture. Thanks for that. You indicated that 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?
Ken Moelis: 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 mark, but base run the company vice presidents, associates. So I think our view is that might have eaten up a point or two of your overall ability on comp ratio. But again, where we still think we managed to a pre-tax 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 it we there was significant inflation in the in those ranks and as inflation is hard to get. It doesn't come back quickly, rid of it.
Operator: Thanks for your questions. [Operator Instructions] Our next question is from the line of James Yaro with Goldman Sachs. Your line is live.
James Yaro: Good afternoon, Ken and Joe. And thanks for taking my questions. Maybe just turning to the senior banker base quickly. I think your net MDs were actually down by four sequentially. Maybe you just talk about, what drove the sequential step down and then, the three hires year to date. But I think you also commented that, it's more about, bringing out your existing capabilities to clients. And maybe you could just help us understand, what the hiring backdrop is for 2024. I assume it'll be substantially slower than in 2023?
Ken Moelis: I thought I'm surprised that our net MDs are down. I don't have it right in front of me because it's actually a canvas is all about, the there. 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 the net change in that between the third quarter and the fourth quarter was slightly down.
James Yaro: Sorry, I thought it was I thought you were doing year-over-year. Sorry. Quarter-over-quarter. Sorry. Yeah, that does make sense.
Ken Moelis: So look, we spent a year and we did it quietly, but we aggressively hired and we aggressively managed. I think a lot of people, we're talking about managing their headcount. 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 twenty four. We'll be opportunistic. Look, there's always places that we are going to hire. We might have levers, so we might have to respond to that. But there 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: OK, that's very clear. Thank you. So you did build another roughly fifty million of cash and short term investments this quarter, this quarter. So I'm going to ask a question that's quite different than what you were getting 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 prompt you to consider increasing capital return, especially in terms of the buyback?
Ken Moelis: Thank you for that. 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, three to five months post the first rate cut in my mind is when I think we'll be at a run rate of twenty five percent pre-tax. I think, again, this calendar year is very difficult because you have a tale of two 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 seven percent 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 spent a lot of time worried 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's excess.
Operator: Our next question is from the line of Stephen Chubak with Wolf Research. Your line is live.
Stephen Chubak: Thanks so much. 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 four hundred 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?
Ken Moelis: I think that might be. Yes, that that sounds maybe a little high, but reasonable.
Stephen Chubak: You can get there with a lower revenue level.
Ken Moelis: Yeah, I think we can. I think we can get there.
Stephen Chubak: Yes, I don't know. I don't think that's probably reasonable.
Ken Moelis: I think remember, some of our 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.
Stephen Chubak: OK, fair enough. The other piece is just on M.D. productivity normalization. And Ken, in the past, you've talked about various normalized productivity ranges. But just given a different composition of M.D.'s, the significant hiring you've done this past year, what level of productivity do you believe is sustainable in a more normal operating backdrop?
Ken Moelis: Well, I agree with you. I think we have a better let's just say I think we've improved our our M.D. and the pools in which they face. I mean, we had we were 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. Industrial's I think we've addressed some of the largest fee pools in the market. So I think we'll be more productive per M.D. And then again, we haven't had a note what you would call a normal year in a long time in M.D. And so, again, I just look at the -- I kind of look at the last three years and say, if you kind of average and 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 got to put those together and do your average productivity off of that. I think we should be above that. And I think, again, we haven't had what I'd call a normal year in three years. So, I don't know exactly what what normal will be in a productivity. But I would again, those three years kind of put together divide by three might be a good way to think about it.
Operator: Thanks for your question. Our next question is from the line of Ryan Kinney with Morgan Stanley. Your line is life.
Charles Smith: Hi, good afternoon. This is actually a Charles Smith filling in for Ryan Kenny. First question on the comp leverage. Just another detail. There would be one level of MD hiring and overall headcount. Are you assuming in that four to five percent comp leverage per one hundred million incremental revenues?
Ken Moelis: Yes, I mean, it's kind of reverting back to a more normal pace than what we've seen in the last two years on the on the hiring front.
Charles Smith: Got it. And then as it relates to be like this quarter in particular, any comments on how that affected the income statement as it relates to revs and non-comp and then just go forward on non-comp?
Ken Moelis: Now, are you asking about Silicon Valley Bank? Is that what?
Charles Smith: Yes.
Ken Moelis: Yes, we don't break any of that.
Joe Simon: Yes, I'm not going to break it out. I just say that, though, it's been a -- 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 and their ability to produce.
Charles Smith: I guess said another way, should we expect an incremental drop off in non-comp as the transaction sharing agreement rolls off?
Joe Simon: Well, again, what I described is pre transaction was like the 45 area. And, that that would exclude anything on the SBB fee arrangement, that ends this quarter. So it shouldn't be it shouldn't be material beyond this quarter. If it's even material this quarter, actually.
Operator: Thanks for your question. We have a final question for today. Follow call from the line of Brennan Hawking with UBS. Brennan, your line is live.
Brennan Hawking: Thanks for taking my follow up. 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 in prior question. But so the investor presentation says year-end MD is 157. For the press release, you've added 10 MD seven promotions and then the press release also shows 160. So as of now, so does the 160 include the two 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?
Ken Moelis: And so it's 160 today. That excludes the two that haven't arrived yet. And 157 refers to as of year-end. And as far as like, if you need like a whole reconciliation, let's do that offline.
Operator: Thank you. We actually do have one final question that just came in. This is coming from the line of Mike Brown from KBW. Your line is live.
Mike Brown: Great. Thanks for taking my question here. Most have been asked, but I guess just wanted to maybe get a little bit more color on the kind of shadow bank backlog or your pipeline, the visibility that you guys have. So can understand that sounds like it will take a little time for the broad based recovery in 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 sounded quite bullish two months ago or so when you characterized that pipeline. So just interesting to hear how that has evolved since. Thank you.
Ken Moelis: Yeah, I said early on 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 this idea that you could 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've 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 in right in front of us now. I think the build-up 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's not everybody. A lot of a lot of people are stepping up to the starting line and getting ready to move. Right now, there is a large amount of transactions that are getting positioned to move. And since I don't think the next move is a rate hike, I just think that that means it's a question of when they move and not if they move.
Operator: Thanks for your thanks for your question. Ladies and gentlemen, that 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.
Ken Moelis: Well, I appreciate everybody's time. We'll see you on the next call. Thank you.
Operator: Thank you. Ladies and gentlemen, this will conclude today's Moelis & Company conference call. Have a great day. We'll see you next time.
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