Release Date: July 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Moelis & Co (MC, Financial) reported $265 million in revenues for Q2 2024, a 45% increase from the prior year.
- First half revenues of $482 million were up 31% from the previous year, showing strong growth across all major product areas.
- The company maintains a strong balance sheet with $191.3 million in cash and no debt.
- The capital markets business had its best quarter since Q1 2022, driven by high demand for hybrid capital and private credit.
- Moelis & Co (MC) added three managing directors focused on technology, industrials, and capital structure advisory, indicating a commitment to talent acquisition and growth.
Negative Points
- Compensation expense remains high, accrued at 75%, which could impact profitability.
- The underlying corporate tax rate is 34%, which is relatively high and consistent with the first quarter.
- The sponsor community has not yet returned to full speed, which could impact future revenue growth.
- The deal environment remains complex and challenging, with transactions taking longer to close compared to the 2021 environment.
- There is uncertainty regarding the impact of potential changes in administration and FTC policies on M&A activity, which could affect future deal flow.
Q & A Highlights
Moelis & Co (MC) Q2 2024 Earnings Call Highlights
Q: Can you give any sense of how the timelines are evolving for converting backlog into realized revenue, and any differences between corporate and sponsor activities?
A: The pipeline continues to build with high activity levels, the highest ever excluding a unique M&A onboarding event. While deals are still complex and take time, the conversion ratio is speeding up. Corporate activities are more active, and sponsors are expected to come to market soon, especially with recent valuation rotations in the public market.
Q: What should we read into the compensation ratio being flat at 75% for the second quarter?
A: The algorithm discussed in February remains relevant. Greater visibility on the full year will be available next quarter, and adjustments to the ratio will be considered then. Positive trends are noted, but visibility is still not solid.
Q: What impact might a new administration and a more deal-friendly FTC have on US M&A activity?
A: A change in regime and FTC could open up many deals. The current FTC philosophy has likely deterred some deals from being attempted. A new environment could significantly affect deal activity, and clarity on corporate tax rates could also influence risk-taking capacity.
Q: Are there any geopolitical actions outside the US that might impact cross-border international M&A?
A: Outside of China, no significant geopolitical concerns are noted. The European, Asian, and Middle East businesses are strong, and expansion in these areas continues aggressively.
Q: What is your perspective on the optimism about sponsor re-engagement and the expected improvement in the back half of the year?
A: Activity levels are high and real, with sponsors preparing to go to market. The momentum is there, and the next six months should see revenues reflecting this increased activity.
Q: Can you provide an outlook on restructuring in the second half of this year and into 2025?
A: Restructuring and capital markets combined contributed around 30% of revenue. The capital markets business is strong, and the backlog is building. As M&A accelerates, restructuring may transition into capital markets revenue.
Q: What drove the decline in net Managing Directors (MDs) quarter-on-quarter, and what is the outlook for hiring?
A: There were a couple of levers and possibly not many starters in this period. However, more MDs have been hired than have left, with some yet to start due to garden leave.
Q: What could be the catalyst for increased sponsor activity, and when might revenues return to a normalized level?
A: Rate cuts and valuation rotations could be catalysts. Even without these events, the next six months should see a return to a more normalized revenue environment.
Q: How does the potential rate cut affect your restructuring outlook?
A: A rate cut of 100-150 basis points might marginally benefit some companies, but most over-levered companies will still face principal and maturity issues. Some restructuring business may transition to private capital markets.
Q: Can you characterize trends in sponsor activity across small-cap, mid-cap, and large-cap spaces?
A: No significant difference is noted between the bottom and top ends of the range covered. Large buyouts may seek liquidity through the IPO market, but overall M&A activity is consistent across sizes.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
