Earnings Call Transcript - EVR Q4 2022

Operator, Operator

Good day and welcome to the Evercore Fourth Quarter and Full Year 2022 Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Evercore management and the question-and-answer session. I will now turn the call over to Katy Haber, Managing Director of Investor Relations and ESG at Evercore. Ma'am, please, begin.

Katy Haber, Managing Director of Investor Relations and ESG

Thank you, Chelsee. Good morning, and thank you for joining us today for Evercore's fourth quarter and full year 2022 financial results conference call. I'm Katy Haber, Evercore's Head of Investor Relations and ESG. Joining me on the call today is John Weinberg, our Chairman and CEO; and Celeste Mellet, our CFO. After our prepared remarks, we will open up the call for questions. Earlier today, we issued a press release announcing Evercore's fourth quarter and full-year 2022 financial results. Our discussion of our results today is complementary to the press release which is available on our website at evercore.com. This conference call is being webcast live in the For Investors section of our website, and an archive of it will be available for 30 days beginning approximately one hour after the conclusion of this call. During the course of this conference call, we may make a number of forward-looking statements. Any forward-looking statements that we make are subject to various risks and uncertainties and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements. These factors include but are not limited to those discussed in Evercore's filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. I want to remind you that the company assumes no duty to update any forward-looking statements. In our presentation today, unless otherwise indicated, we will be discussing adjusted financial measures, which are non-GAAP measures that we believe are meaningful when evaluating the company's performance. For detailed disclosures on these measures and the GAAP reconciliations, you should refer to the financial data contained within our press release which is posted on our website. We continue to believe that it is important to evaluate Evercore's performance on an annual basis. As we have noted previously, our results for any particular quarter are influenced by the timing of transaction closings. I will now turn the call over to John.

John Weinberg, Chairman and CEO

Thank you, Katy. And good morning, everyone. 2022 was undoubtedly a complex and challenging environment. Yet through all of the volatility and macro-driven headwinds, Evercore was able to serve our clients and strategically invest in our business. We continued to perform well, both in the quarter and for the full year. In fact, 2022 was our second best year on record for the firm with $2.8 billion in revenue, $529 million in net income, and $12.1 in earnings per share. For the full year and fourth quarter, we also made further progress on our goal of narrowing the gap between Evercore and the top three bulge bracket firms in terms of advisory fees. 2022 also marked a year of investment for Evercore as we continued to execute on our long-term growth strategy. We promoted and hired A-plus talent in our important strategic target areas that will drive long-term value for the firm, including seven advisory senior managing directors and one senior advisor in 2022. We also continued to build our important product capabilities and diversify our business to connect with our clients more deeply. As we've discussed previously, our revenues today are meaningfully more diverse than they had been historically. In each of the past four years, including 2022, our non-M&A businesses accounted for at least one-third of our revenue. The diversification of our business stems from the scale we filled across many capabilities, including restructuring, private capital advisory and fundraising, private capital markets, capital markets advice and execution, equity sales and trading, and wealth management. Additionally, we've managed our balance sheet to create the capacity to invest in our franchise through cycles. We will continue to execute on our long-term strategy by investing in targeted areas of growth and in areas where we see opportunities having the highest impact. Before I begin recapping the year, I'd like to quickly touch on our recent CFO announcement. Last quarter, we announced that Celeste will be leaving Evercore. This is Celeste's final quarter with us. And while we are sad to see her go, we feel fortunate to have worked with her and value the contributions she has made to the firm. As you may have seen, we are excited to share that Tim LaLonde will become our CFO effective March 6. Over the last 22 years, Tim has been an integral part of Evercore's leadership, driving the firm's successful growth. He brings a deep knowledge of Evercore in the role and is highly respected as a partner with a superior record of delivering operational excellence. We look forward to his contributions as CFO and are confident that he will position the firm for sustainable long-term value creation. With that, in a similar fashion to a year ago, I want to provide a more detailed view of the past year and, again, outline our plans for the future. Starting with global advisory, our teams remain very active and continue strategic dialog and execution with clients. Looking at our market activity more broadly, global announced M&A activity was down 36% compared to record levels in 2021. However, M&A volumes in 2022 were generally in line with historical averages. For Evercore specifically, the number of announced global transactions was down only 9% in 2022 compared to declines of about 40% for our bulge bracket peers, and 25% for our independent peers. While advising on large M&A transactions globally is very much core to what we do, a meaningful portion of our business stems from deals less than $5 billion in transaction value. Over the last year, we saw an increase in clients seeking advice on highly complex and unique situations, including public-to-private deals which reached record levels in 2022. As for sectors, tech continued to be active, as well as healthcare and industrials. We also saw strength in traditional energy, renewables, and infrastructure. Next, from a geographic perspective, our team in Europe had a very strong year, representative of investments we've been making in the region over the last several years. Our European advisory business had its best year in Evercore's history. We saw strength across the energy, financials, utilities and infrastructure sectors, as well as debt advisory. We continue to focus on efforts on expansion in the region and around the globe. To that end, two of our 2022 SMD hires that I mentioned earlier were international. Within global advisory, we continue to be active in areas outside of traditional M&A. First, our strategic defense and shareholder advisory team remains very active in 2022 as the number of campaigns, particularly in the U.S., was on par with 2021 levels. The trend of targeting large-cap companies continues, representing almost 30% of activist campaigns in 2022 from the prior year. Evercore has advised companies representing over $1.5 trillion in market value in this space, and we have the largest team of dedicated activist defense professionals on Wall Street. Turning to restructuring, the business won a significant increase in assignments over the past 12 months and we are entering 2023 with a robust pipeline of opportunities. The growth in the business reflects a mix of company and creditor assignments, ranging from bankruptcies and out-of-court settlements, to liability management and distressed financing. While default rates are still relatively low, rising rates and corporate margin pressure should present significant additional opportunity for our restructuring team. We're well positioned for this upcoming cycle and our restructuring team continues to collaborate with industry bankers to provide our clients with the most comprehensive advice. Next, our market leading businesses focused on private capital, which include fundraising, buying and selling of LP and GP stakes, continuation funds, as well as our real estate capital team. 2022 represented the second best year on record for these businesses in aggregate; collaboration across these teams and the sponsor M&A and industry teams has driven synergies and will continue to be a great platform for growth. We've also continued to build out our private capital markets team which advises and executes on privately placed equity and debt financings as well as complex balance sheet and capital structure issues. The underwriting business had a challenging year with industry issuance down 80%, resulting in the lowest year of issuance since the Great Financial Crisis. While broad industry trends impacted our business, we outperformed on a relative basis and continued to gain share once activity returned in the second half of the year. While the IPO market was quiet, Evercore participated in one-third of all U.S. IPOs greater than $50 million and in four of the five largest U.S. IPOs in 2022. Notably, our role continues to elevate as we were book runner on all of our equity and equity linked underwriting transactions in 2022. Healthcare continued to be a standout sector for us, and we were involved in almost 50% of all healthcare underwriting deals in 2022. Additionally, we've continued to invest in other products such as convertibles, which continued to gain momentum and provide an additional product offering for our clients. We are pleased with the advancements of our underwriting business and expect to see a pick-up in activity when the market stabilizes. Next, our equities franchise continues to focus on providing our clients with the highest quality research and service as they navigate volatile and uncertain markets. Our research franchise had a noteworthy year. We were ranked number one by institutional investor on an individual weighted basis for the first time ever and had the highest number of top-three analysts of any firm on Wall Street. And finally, in wealth management while the broad market decline impacted our clients' portfolios and assets under management for the year, the business continued to have strong long-term performance and client retention. Now, I want to turn to our growth roadmap for the long term. An important pillar of our strategy is tied to the expansion and enhancement of our client base and coverage model. We have a very strong traditional M&A business and we continue to fill areas of sector and geographic white space where there is ample room to expand. We remain focused on investing in the fastest growing segments of the economy, including fintech, cleantech, biotech, and more traditional areas of technology such as software, as well as expanding our global footprint. We continue to invest in and develop our sponsor coverage effort. We've increased focus on expanding our private client capital businesses and believe there are incremental opportunities to serve this client base, both in this business and our sponsor M&A practice. In addition, as we mentioned last quarter, we added several senior bankers to our U.S. Financial Sponsors Group as we continued to invest in this important space. Overall, we see real opportunities from deepening and broadening many of our product capabilities. We're opportunistically investing selectively across our business and see strong returns from doing so. As we make these investments, we will continue to navigate the market for talent. We'll stay active and selectively recruit A-plus talent while maintaining a high bar for all hires. We begin 2023 with seven newly promoted SMDs in our advisory and underwriting businesses across various sectors and capabilities, as well as one in our equities business. Cultivating the next generation of talent is core to our success, and we are excited about our pipeline of talent. Already this year, we have had an additional SMD committed to joining our private capital advisory business later this quarter. Before I turn the call over to Celeste to review our financials, I want to make a few final comments. 2023 will be another complex year and it will be difficult to repeat the record results that we had in the first half of 2022. That said, we remain focused on our expense base, both comp and non-comp, and maintaining a durable and liquid balance sheet. There's quite a bit of discussion around the probability of recession as we begin 2023. While some believe we will enter one, others do not. Either way, we feel we are well-positioned. We're starting off the new year with a strong backlog although it is down from where it was a year ago, which followed the strongest year for M&A activity on record. Similar to last quarter, there remains greater risk of execution as transaction announcements continue to be slower and the timing of closings is elongated. And while economic stability and market conditions will continue to influence field activity, strategic dialog with clients continues at very high levels. As we look forward, we are confident in the outlook for our business. We believe the firm is well-positioned to capitalize on the current environment and the opportunity that lies ahead as the market stabilizes. With that, let me turn it over to Celeste.

Celeste Mellet, CFO

Thank you, John. Before I review the financials, I want to thank John and the rest of the team as this is my final earnings call with Evercore. It has been a great pleasure to work with this team as well as our sell-side research analysts and shareholders. For the fourth quarter of 2022, net revenues, net income, and EPS on a GAAP basis were $831 million, $140 million, and $3.44, respectively. For the full year, net revenues, net income, and EPS on a GAAP basis were $2.8 billion, $477 million, and $11.61, respectively. My comments from here will focus on non-GAAP metrics, which we believe are useful when evaluating our results. Our standard GAAP reporting and a reconciliation of GAAP to adjusted results can be found in our press release, which is on our website. Fourth quarter adjusted net revenues of $837 million, declined 26% versus the fourth quarter of 2021, which was a record fourth quarter. On a full-year basis, adjusted net revenues of $2.8 billion declined 16% compared to 2021's record results. Fourth quarter adjusted operating income and adjusted net income of $218 million and $152 million decreased 53% to 55%, respectively. Adjusted earnings per share of $3.50 decreased 51% versus the fourth quarter of 2021. For the full year, adjusted operating income and adjusted net income of $723 million and $529 million both decreased 37%, while adjusted earnings per share of $12.1 decreased 31% versus the full year 2021. Our adjusted operating margin was 26.1% for the fourth quarter and 25.9% for the year, in line with pre-2021 historical averages. Turning to the businesses, fourth quarter advisory revenues of $704 million declined 27% year-over-year. Advisory revenues were $2.4 billion for the year, a 13% decline compared to 2021, and our second-best ever for advisory. In accordance with relevant accounting principles, our revenue includes approximately $116 million from transactions that closed in early January and/or had other conditions pending a period. To compare, we recognized $21 million in the fourth quarter of 2021 and $32 million in the third quarter of 2022 in accordance with the same accounting principles. Fourth quarter underwriting revenues of $44 million were down 32% compared to the fourth quarter of 2021. For the full year, underwriting revenues were $123 million, down 50% versus 2021, reflecting a decline in overall market issuance. Commissions and related revenue of $54 million in the fourth quarter were down 2% year-over-year. For the full year, commissions and related revenue of $206 million were flat compared to 2021. Fourth quarter adjusted asset management and administration fees of $17 million decreased 23% year-over-year, while full-year revenues of $71 million decreased 9% compared to 2021, reflecting a decline in AUM, driven by market depreciation. Fourth quarter adjusted other revenue net was a gain of approximately $18 million, in part reflecting the increase in value of investment funds portfolio, which is used as a hedge for our DCCP commitment, as equity markets rallied in the fourth quarter. For the full year, adjusted other revenue net was a loss of $9 million as equity markets were negative for the year. Other revenue was a gain of $32 million in 2021, driven by positive equity market. Turning to expenses, the adjusted compensation ratio for the fourth quarter was 62.5%. Our full-year reported adjusted comp ratio was 60.9% versus 55.7% for 2021. When adjusting the compensation ratio to exclude the hedge in our DCCP, the comp ratio for the full year would have been slightly lower at 60.3% compared to 56.2% in 2021 when making the same adjustments. Fourth quarter non-compensation costs of $96 million were down 5% from a year ago, primarily driven by a decrease in other operating expenses. Last year reflected the initial charitable contribution to the newly created Evercore Foundation. This was partly offset by increases in travel, which began to resume during the fourth quarter of 2021, and increased throughout 2022. For the full year, non-compensation costs of $365 million were up 11%, largely driven by increases in travel related to a return to more normalized levels of travel and professional services, as well as increased costs due to return to office, inflationary pressures on technology, and higher occupancy expenses as we added more space during 2022. As we have previously mentioned, we are focused on our expense management practices across comp and non-comp. Our headcount is down quarter-over-quarter and since June. We continue to manage out lower performers and limit additional headcount and replacement hiring. On the non-comp side, we are managing expenses tightly. We expect growth in non-comp in 2023, but at a significantly lower rate than what we saw in 2022. This will be driven by continued normalization in travel practices, inflationary pressures across both travel and tech, as well as continued occupancy related increases driven by the annualization of new space and contractual rent increases. If the market environment improves and activity subsequently picks back up, we could see an increase in deal-related expenses. Our adjusted tax rate for the quarter was 28.2%, up versus last year. The full-year adjusted tax rate was 24.5%, also up versus last year. The increase for the quarter and the full year were primarily driven by changes in state and local taxes as well as nondeductible expenses, including meals and entertainment and stock-comp expenses. Turning to our balance sheet. As of December 31, our cash and investment securities totaled about $2.1 billion. Our excess cash as a percentage of our total cash and investment securities is in the low teens. We review our excess cash position with respect to the current business environment and we continue to hold more cash than what is required to run the firm as market and economic uncertainties persist. We remain committed to returning all excess cash, all excess capital, not invested in the business to our shareholders over time, while maintaining a durable balance sheet. In 2022, we returned a total of $655 million to shareholders through dividends and repurchases of 4.4 million shares at an average price of $117.27. During 2022, we more than fully offset the dilution from the RSUs that were granted as part of our annual bonus compensation process, and we expect to continue to do so in future periods. Our fourth quarter adjusted diluted share count increased slightly to $43.5 million from $43.2 million in the third quarter of 2022, primarily reflecting the increase in the share price, investing of awards, partially offset by share repurchases. Relative to a year ago, our share count is down significantly from $47.3 million in the fourth quarter of 2021. With that, we will now open the line for questions.

Operator, Operator

Thank you. We will now conduct the question-and-answer portion of the conference. Our first question will come from Brennan Hawken with UBS. Your line is open.

Brennan Hawken, Analyst

Good morning. Thanks for taking my question. So, the outlook commentary was a bit more limited than we're used to hearing, likely reflecting uncertainty. But one thing I'm curious about from your perspective, what do you think recovery might look like, because this is something that's often debated, and I know it's a tough question to answer, but recency bias to me results in folks often looking at the most recent recoveries which were aided a lot by a Fed that was quite accommodative. And so, if we end up seeing a less accommodative central bank, how do you think that might play through in a recovery? And when you look back to prior cycles, which cycles would you think might be most apt as you sit here and play out what a recovery might look like, obviously, depending on whether or not we'll enter a recession, but generally based on what we can see today? Thanks.

John Weinberg, Chairman and CEO

Thank you for your question. Comparing this cycle to previous ones is challenging due to its uniqueness. Currently, many strategists and sponsors are taking a cautious approach, adopting a wait-and-see stance. We have observed that the investment-grade public market is starting to open up on the credit side, indicating some liquidity for strategic transactions. However, many boards and management teams are still hesitant to move forward due to various external factors. They are closely monitoring the Federal Reserve's actions and messaging, inflation trends, and the geopolitical landscape. Generally, management teams and boards are eager to begin strategic discussions and outline their growth objectives. On the sponsor side, the non-investment grade and leveraged finance markets are still somewhat constrained, leading to a wait-and-see attitude. While private credit is available, it is not large enough to significantly impact the market. We are also observing whether the value expectations of buyers and sellers are aligning. As some transactions start to proceed, there will be careful observation of the responses. It may take time to build momentum for recovery, but once it begins, it could accelerate. Although interest rates may remain relatively high compared to recent history, there is a strong desire from management teams and sponsors to move forward with their plans. As conditions improve and deals are completed, we can expect an increase in transaction activity.

Brennan Hawken, Analyst

All right, John. Thanks for that color.

Operator, Operator

Thank you. Our next question will come from James Yaro with Goldman Sachs. Your line is open.

James Yaro, Analyst

Hey, John and Celeste. Thanks for taking my questions. I just wanted to ask quickly on the debt financing markets, which do seem to have reopened to some extent so far in January, and I guess, in February. Maybe if you could just speak to whether some of the financing pressures holding up M&A deals have subsided, and how this could impact the speed of an M&A recovery. And then conversely, could this have a more negative impact in terms of reducing the restructuring opportunity?

John Weinberg, Chairman and CEO

I will begin by addressing the latter part of your question. I believe the merger market could significantly pick up, and restructuring is likely to continue at a high pace. This is because restructuring has a wide range of applications that are specific to companies rather than industries. We are observing numerous opportunities, especially in distress financings where companies need guidance regarding their capital structures. Our restructuring team is experiencing diverse activities, and I anticipate this trend will continue even if the merger market recovers. Regarding the credit markets, the recent opening and strength of these markets have undoubtedly benefited investment-grade corporations and larger companies, allowing them to consider potential deals. However, the recovery is not solely based on access to the market; companies are cautious and waiting for the right timing when the market will be more receptive to significant transactions. I foresee a recovery in this area as well. While it is true that the credit markets facilitate transactions, the key factor will be the confidence of management teams and boards to pursue larger deals that align with their strategic goals. There is considerable pent-up demand from corporations and sponsors to move forward with transactions, and once they feel there is broad acceptance, we will likely see activity increase. I expect this momentum to build.

James Yaro, Analyst

That's really clear. Thank you.

Operator, Operator

Thank you. Our next question will come from Matt Moon with KBW. Your line is open.

Matthew Moon, Analyst

Hi. Good morning. I wanted to discuss the contribution from non-M&A advisory. Recently, you've mentioned this segment accounting for about a third of total revenue over the last few years. I'm interested in how this has changed over the past year, considering the lower underwriting fees but likely a larger input from private capital advisory and restructuring. Specifically, I'm curious if the 2022 figure is in line with the proportions you've shared over the last three years, and how we should view the outlook for non-M&A advisory revenues in 2023, especially in light of the current M&A advisory trends.

John Weinberg, Chairman and CEO

Sure. Thank you. Well, generally, I think we're still in the one-third area as to where these businesses are actually coming out in terms of our total revenue. I think it's generally in the same place. These are very, very strong businesses that are, I think, well positioned. And I think that the prospects for these businesses are very good and we're actually investing in them. Whether it's in restructuring, we promoted another senior managing director who is going to be very productive. They're very busy right now. They're taking on many new assignments and they've got a lot to do. And so, I think that we feel good about that business. Private capital advisory, we're investing in there too. I mean, we really think we have best-in-class businesses there and we're trying to push it. We're giving them opportunities to grow. We think that's a real strategic opportunity for us. And we think that's important. And then the other businesses like equity capital markets and equity trading are actually well-positioned and everybody seems to be gaining some ground in a relative sense. So debt advisory, the same. Wealth management, I think, is doing quite well. So, I think the answer to your question is that these are good businesses and they will drive performance. Right now, they continue to be in the one-third area. And I don't think that's going to change because I think our merger opportunities will continue to grow. So, I think right now, I think it's not changing dramatically other than I feel like we feel good about the prospects of those businesses and really how we're having the dialogs that we're having in there. Celeste, do you want to say anything more on that?

Celeste Mellet, CFO

Yeah. I mean, as John said, the merger business will remain the most important business for us as a firm. As you pointed out, ECM will ebb and flow. A strong ECM year for us can help that number and helps a lot of things that provide us with a lot of operating leverage. But I think as John mentioned, we're investing in all of our businesses, but the merger business will remain the most important that we're very happy we've invested in delta diversification over the last 10 years.

Operator, Operator

Thank you. Our next question will come from Jim Mitchell with Seaport Global. Your line is open.

James Mitchell, Analyst

Hey. Good morning. You mentioned Europe is having a record year last year. It did start off strong just from the environment perspective, but I know you've been investing heavily there too. So can you just talk a little bit about your outlook there, both from your own investment standpoint, the momentum you have as well as the environment?

John Weinberg, Chairman and CEO

The environment began very positively at the start of last year, and it seems many of our competitors shared that sentiment. However, it started to taper off somewhat in the later part of the year. Looking ahead, we feel optimistic about the beginning of this year regarding that business. We had some concerns around the midpoint of the third quarter, but now we believe the situation has improved. Regarding our investments in Europe, we remain committed to our strategic approach, focusing on specific areas where we believe we can make meaningful and productive investments for our shareholders. We are actively exploring opportunities in those sectors to foster growth. We are engaged in important discussions and plan to pursue growth in Europe thoughtfully, ensuring that our investments yield returns. Currently, our strategy appears to be effective, and we will continue to be careful and diligent in our efforts.

James Mitchell, Analyst

Okay. Thanks for the color.

Operator, Operator

Thank you. Our next question will come from Devin Ryan with JMP Securities. Your line is open.

Devin Ryan, Analyst

Good morning. I have a broader question regarding the demand for advisory services. One key indicator we often examine to gauge the advisory market is global M&A volumes, which many people use as a proxy for market conditions. However, as the market continues to evolve, it encompasses much more than just that and includes various additional capabilities for clients. I would like to understand how, John, you would describe the evolution of demand for advisory services in general and how your approach to client engagement has changed as well. Additionally, I am interested in understanding clients' willingness to pay for advisory services beyond just M&A capabilities.

John Weinberg, Chairman and CEO

Thank you for the question. Our goal is to become the strategic advisor for our clients. When we engage with clients, we aim to build strong relationships with senior decision makers, provide top-tier capabilities and products, and assist them with their key priorities. In the early days of the firm, we were doing this, but our small client product base limited us. Now, we offer a wider array of products, allowing us to approach CEOs, CFOs, and heads of M&A with a more comprehensive set of solutions. This broader offering is creating opportunities for us to serve clients better, whether through activist advisory assignments, innovative growth ideas, or capital structure assessments. Consequently, we're fostering stronger connections and ongoing dialogues with clients. Our investments and efforts are starting to make a real impact as we expand our client reach. Over time, we're focusing on gaining more clients and enhancing our client base. Our success will depend on our ability to grow this base and provide them with high-quality products, while also ensuring we have valued advisors in front of them. Overall, our model is showing positive signs right now.

Devin Ryan, Analyst

Okay. And John, just one clarification on just their willingness to pay for types of advice beyond just something that's transactional.

John Weinberg, Chairman and CEO

Understood. We are definitely generating advisory fees, including debt advisory and restructuring advisory fees. Merger deal fees will continue to be the primary source of revenue for the firm since transaction-driven fees are among the most lucrative. We are also seeing an increase in non-transactional advisory fees. In response to your question, we are building that aspect of our business, and I believe that the more expertise we have and the broader our product offerings, the more we can capitalize on this trend. If we succeed in executing a merger, we can also provide debt advisory services, allowing us to leverage various parts of the transaction to charge fees. This is progressing well as we learn how to effectively apply our capabilities to serve clients, ultimately providing them with valuable solutions.

Devin Ryan, Analyst

Great. Thank you.

Operator, Operator

Thank you. Our next question will come from Steven Chubak with Wolfe Research. Your line is open.

Brendan O’Brien, Analyst

Good morning. This is Brendan O'Brien filling in for Steven. So, I wanted to ask on the comp ratio. Given all the uncertainties surrounding the outlook and with backlogs entering the year at a weaker level this year than last, it feels like comp ratios are likely to persist into at least the first half. At the same time, it sounds like the impact of your DCCP hedge was a significant driver of the incremental comp ratios seen this year. So I wanted to get a sense as to whether the 61% accrual levels seen this year should be a good place to start for next? And also I was hoping if you could help frame how we should be thinking about incremental comp leverage from here. Your full year comp expense was down about 8% versus a 16% decline in your overall revenues. Would you expect that same dynamic to hold in 2023?

Celeste Mellet, CFO

Thank you for your question. The compensation ratio will continue to be influenced by revenue in the current environment. We will determine and provide this ratio in April, based on our full-year outlook rather than just one quarter. As a reminder, our Senior Management Directors are compensated based on performance, which constitutes the largest portion of our compensation expenses. However, base benefits and other factors are becoming increasingly important in this environment. As you've noticed, we've decreased our headcount quarter-over-quarter and have been more proactive in managing lower performers since June. We're also limiting additional headcount and replacement hiring, and we will maintain this approach as long as the environment remains challenging. Nevertheless, we plan to continue investing in top-tier talent. The compensation ratio will reflect how all these elements come together, and we will carefully consider these factors based on the revenue environment and our perceived opportunities for future investments in the franchise.

John Weinberg, Chairman and CEO

I have one more point to make regarding the compensation ratio, which will primarily be influenced by revenues and revenue growth. Our backlog remains robust, but the key variable for me is our capacity to convert that backlog into revenue, especially since the process of finalizing deals has been prolonged. Therefore, the crucial factor is the realization rate of our backlog. If we can start to accelerate this rate, I believe we will see an increase in revenue and alleviate some of the pressure on the compensation ratio.

Brendan O’Brien, Analyst

That's great color. Thank you, both.

Operator, Operator

Thank you. Our last question will come from Manan Gosalia with Morgan Stanley. Your line is open.

Manan Gosalia, Analyst

Hey. Good morning. John, you noted that dialog with clients is still pretty active, particularly on the strategic side. So any differentiation you're seeing in terms of deal size? I know that higher antitrust scrutiny is not new, but is that still weighing on large deal activity? And are you seeing more dialog in smaller deals right now?

John Weinberg, Chairman and CEO

I think we're seeing really healthy deals overall. It seems that people are being very cautious about antitrust issues, and I'm glad you mentioned that because it's significant and something we're monitoring closely. This caution isn't stopping management teams from considering large opportunities, but there is careful scrutiny regarding how antitrust factors will affect these situations. Typically, we expect recovery to come from the middle or the lower segments and then accelerate from there. In this instance, the middle market and deals under $5 billion appear to be quite robust. Additionally, based on my discussions with many of our bankers, I see that some substantial deals are being earnestly considered and may progress. I don’t think there's much of a distinction between large and small deals right now. However, much will depend on the wait-and-see approach we've discussed earlier in this call. It will be intriguing to observe when transactions of various sizes begin to move forward and how swiftly others in those categories follow suit. I could foresee a broad-based recovery, but it's still uncertain due to the significant market unpredictability that is currently holding things back.

Manan Gosalia, Analyst

Great. Thank you.

Operator, Operator

Thank you. And we do have a follow-up question from Brennan Hawken with UBS. Your line is open.

Brennan Hawken, Analyst

Good morning. Thanks for taking my follow-up. One just sort of clarification quickly. The 130 SMDs that you note in the release that that includes the 1Q recruit, but does that also include the seven advisory promotions?

Celeste Mellet, CFO

The promotions will be reflected in the first quarter numbers because they are effective as of March 1. So they will be included in the first quarter numbers.

Brennan Hawken, Analyst

Okay. Excellent. And I don't know if Tim can hear, I know next quarter, it will be your call, but congrats on the new role. And just a quick one to sneak in here. You've been at Evercore for over two decades and held many roles. So from your perspective, what do you think is most misunderstood about Evercore as far as the valuation of the company was reflected?

John Weinberg, Chairman and CEO

Brennan, I'm so sorry, but Tim actually is out on a medical situation for this morning, and so he's not here for this call. He may be listening in, but I don't think he's going to be able to charge into that one. Let's put that one on hold, and in our next call, we'll make sure we remember and answer it for you.

Brennan Hawken, Analyst

Okay. I hope he's doing okay.

Celeste Mellet, CFO

He’s fine, but he couldn't be here today unfortunately. He would have liked to have been.

Brennan Hawken, Analyst

Fair enough. Thanks so much.

John Weinberg, Chairman and CEO

Thank you. All right. Thank you, everyone. See you next time.

Celeste Mellet, CFO

Thanks, everyone.

Operator, Operator

Ladies and gentlemen, this concludes today’s Evercore’s fourth quarter 2022 financial results conference call. You may now disconnect.