Moelis & Company Q2 FY2025 earnings call

• Revenues in the second quarter and first half reflect investments over the years, a globally integrated platform, and a relentless focus on client execution.
• The transaction environment improved significantly since April, with new business origination remaining healthy and the pipeline near record levels.
• Investments in capital markets have paid off, with the team achieving record revenues in the first half of the year.
• In the second quarter, 3 leading private capital advisory bankers joined the firm, underscoring the ambition to build a premier platform in secondary and primary capital solutions for sponsors.
• The firm announced a CEO transition, with Navid set to become CEO and Ken serving as Executive Chairman.
• The capital structure advisory team continues to work on liability management engagements, and investments in the creditor-side franchise are showing results, with recent hires in Europe in technology-focused and business services roles.

In the second quarter, Moelis & Company reported $365 million in revenues, a 38% increase from the prior year period, marking the highest second quarter revenues on record. First-half revenues totaled $672 million, up 39% from the prior year. The growth in revenues is primarily attributable to growth in M&A and capital markets. The second-quarter compensation expense ratio was accrued at 69%, consistent with the prior quarter. The second quarter non-compensation expense ratio was 14.4%. The firm anticipates full-year growth of non-compensation expense to be approximately 15% compared with the prior year. The corporate tax rate was accrued at 29.5%, consistent with the underlying tax rate in Q1 prior to the discrete tax benefit related to the vesting of equity awards. The firm maintains a strong balance sheet with cash and liquid investments of $475 million and no debt.

• Anticipates full-year growth of non-compensation expense to be approximately 15% compared with the prior year.
• Continues to invest aggressively in key areas such as the private capital advisory franchise and other growth opportunities.
• Enters the second half of the year with momentum across the business and confidence in the team's ability to execute for clients.

• Remarks on the call contain forward-looking statements subject to various risks and uncertainties, including those identified in Moelis & Company's filings with the SEC. Actual results could differ materially from current anticipations.

Q: On sponsors reengaging and sectors, Ken discussed that the transaction environment improved since April, with new business origination healthy and the market improving almost daily, noting no big bang but a steadily improving market.

A: Ken stated that deals were on hold from April 2 to around May, but activity has been gradually picking up, with the market improving daily and sectors broadly seeing reengagement.

Q: Regarding the addressable market for the private capital advisory business, Ken mentioned it is a couple hundred million+ opportunity, and the firm hired key leaders in the space and will aggressively scale the franchise.

A: Ken and Navid talked about targeting large total addressable markets (TAMs), hiring elite lateral talent, and maintaining a strong culture as part of the growth strategy.

Q: On the next phase of growth, Navid outlined focusing on investing in the highest TAMs, lateral hiring of difference makers, and maintaining a strong culture with internal talent development.

A: Navid explained the strategy involves targeting big opportunities, hiring top players, and ensuring the internal talent development engine continues operating at a high level.

Q: About the post-Labor Day outlook, Ken said the market is improving almost daily, with transaction activity increasing, though not a big bang but a steady improvement.

A: Ken discussed the market recovery post-Liberation Day, the S&P 500 uptick, and how transaction activity has been steadily improving each week since June.

Q: On the comp ratio and PCA investment, Ken stated the comp ratio is flexible and top-line driven, with PCA investments expected to pay off over time.

A: Ken addressed that the comp ratio is influenced by top-line growth and that the firm is confident in the investments made, including in the private capital advisory franchise.

Q: On the breakout of advisory vs M&A revenues, Ken said it was close to the prior quarter's split of approximately 2/3 M&A and 1/3 non-M&A.

A: Ken confirmed the revenue split was consistent with the prior quarter's pattern.

Q: On the ramp-up of the private capital advisory business, Ken said new hires in PCA can ramp up more quickly due to existing client dialogues.

A: Ken explained that new hires in PCA can slot into ongoing client conversations more rapidly than traditional sector bankers, leading to quicker productivity.

Q: On returning excess cash, Ken said the firm is in discussions with the Board about returning capital, likely through stock repurchase.

A: Ken mentioned that the firm recognizes it has excess capital and is exploring various ways to return it to shareholders, with stock repurchase likely playing a prominent role