Earnings Call Transcript - MC Q2 2025

Operator, Operator

Good afternoon, and welcome to the Moelis & Company Earnings Conference Call for the Second Quarter of 2025. To begin, I'll turn the call over to Mr. Matt Tsukroff. Please go ahead, sir.

Matthew Tsukroff, Executive

Good afternoon, and thank you for joining us for Moelis & Company's Second Quarter 2025 Financial Results Conference Call. On the phone today are Ken Moelis, Chairman and CEO; Navid Mahmoodzadegan, Co-Founder and Co-President; and Chris Callesano, 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 Chris to discuss our results.

Christopher Callesano, CFO

Thanks, Matt, and good afternoon, everyone. On today's call, I will go through our financial results. Ken will comment further on the business, and Navid will provide a few remarks before we open the call for Q&A. We reported $365 million of revenues in the second quarter, an increase of 38% versus the prior year period and our highest second quarter revenues on record. Our first-half revenues of $672 million were up 39% from the prior year period. The year-over-year increase in revenues in both the second quarter and first half of the year is primarily attributable to growth in M&A and capital markets. Moving to expenses. Our second-quarter compensation expense ratio was accrued at 69%, consistent with last quarter. Our second quarter non-compensation expense ratio was 14.4%. We continue to anticipate the full-year growth of non-compensation expense to be approximately 15% compared with the prior year. Moving to taxes. Our 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. Regarding capital allocation, the Board declared a regular quarterly dividend of $0.65 per share, consistent with the prior period. And lastly, we continue to maintain a strong balance sheet with cash and liquid investments of $475 million and no debt. I will now turn the call over to Ken.

Kenneth David Moelis, Chairman & CEO

Thanks, Chris, and good afternoon, everyone. Our revenues in the second quarter and first half of the year reflect the investments we've made over the last few years, our globally integrated platform and our team's relentless focus on executing for our clients. We entered the second half of the year in a significantly improved transaction environment since we last spoke in April, which was right in the heart of the post-Liberation Day market chaos. In retrospect, Liberation Day did cause a temporary disruption to activity. However, our new business origination remained healthy and our pipeline currently sits near record levels. Both our strategic and sponsor clients are moving forward with transactions driven by technology disruption and the need for sponsors to recycle capital. The investments we've made in capital markets have continued to pay off as well as our team achieved record revenues in the first half of the year. The team enters the second half of the year with strong momentum as investor risk appetite grows and capital is generally available. During the second quarter, three of our leading private capital advisory bankers joined our firm, underscoring our ambition to build the premier platform in secondary and primary capital solutions for sponsors. We continue to believe there is a significant opportunity for us to grow this franchise, and we plan to aggressively scale into a market leader. Finally, our capital structure advisory team continues to work on a steady amount of liability management engagements across a range of industries, and our investments in our creditor-side franchise are beginning to show results. In addition to our hiring in PCA, we welcomed a technology-focused and business services managing director, both based in Europe during the second quarter. In summary, we entered the back half of the year with momentum across the business, and I'm confident in our team's ability to execute for our clients. Before I pass it to Navid, I'd like to make a few remarks about our upcoming CEO transition. With the firm in such a strong position financially, strategically and culturally, the Board and I determined this was the right time to elevate our next generation of leadership. Navid founded the firm with me 18 years ago and has been a key driver of our most impactful growth initiative and was one of the best strategic advisers I've ever worked with, making him well-positioned to lead us through the next phase of growth as CEO. In my role as Executive Chairman, I'll spend even more time with clients and in boardrooms around the world advising on critical strategic decisions while also remaining involved in the firm's long-term strategy. And although I am excited to spend more time with our clients, I'll certainly miss my time with you on these quarterly earnings calls. I know you've been hearing my voice for a long time. I know you'll be in good hands with Navid when he gets the mic at our quarter three earnings call. So with that, I'll pass it to Navid for a few more remarks.

Navid Mahmoodzadegan, Co-Founder, Co-President

Thanks so much, Ken. I'm honored to step into the role of CEO at a firm that I've had the privilege of building from the very beginning. As CEO, I will continue to focus on the principles that have been key to our success over the past 18 years, an intense focus on clients, investing in our firm's talent, fostering innovation through the adoption of new ideas and technologies, and, of course, driving returns for our shareholders. We head into the next phase of growth with the highest quality talent and most extensive capabilities for clients in our history. I'm extremely excited about the opportunities ahead and look forward to working more with all of you in my new role. Operator, I think you can now open it up for questions.

Operator, Operator

We'll take our first question today from Devin Ryan at Citizens JMP.

Devin Patrick Ryan, Analyst

First off, welcome, and congratulations on the new role and to you as well, Ken. I always enjoy the calls, but looking forward to Navid being on as well. I guess maybe just first place I want to start is on sponsors reengaging and I heard some of the prepared remarks, but just love to get a little more flavor around the progression of reengagement and just maybe even from a sector perspective, are you seeing it across kind of all sectors? Obviously, areas like technology are still dealing with higher fire around. So are there certain sectors that maybe aren't coming back as fast? Just love to get a little bit of a flavor for kind of the level of reengagement and then what that looks like in different industries as well.

Kenneth David Moelis, Chairman & CEO

Okay. Let's begin by discussing the macro environment. Last time we spoke, we were experiencing a significant market downturn. This wasn't limited to the market alone; there were genuine concerns about tariffs and their potential impact on the industry. While sometimes market valuations and interest rates pose challenges, we also faced operational issues regarding future developments. We likely reached our peak backlog on March 31, but then on April 2, things changed. During that period, deals in the pipeline continued to progress, but from April 2 to mid-May, many people were hesitant to take action. Although some transactions were completed, not many new initiatives were launched. Gradually, activity picked up, and in the last 5 or 6 weeks, we've seen a positive trend weekly since then. It feels like we're nearly back to the level of enthusiasm we had before April 2 and March 31, and the momentum is growing. While the pipeline isn't at record highs, the energy is definitely present. Regarding sectors, it seems strong overall, with just a couple of exceptions. While I can't speak for every transaction in every industry, within our specific area, we're seeing robust activity across various sectors.

Navid Mahmoodzadegan, Co-Founder, Co-President

Yes, Devin, I think there's still some sectors that are right in the sweet spot of some of the trade uncertainty, maybe some of the parts of consumer, parts of industrials, manufacturing. But as Ken said, I think the strength we're seeing is more broad than narrow.

Devin Patrick Ryan, Analyst

Yes. Okay. That's good to hear. And then just for my follow-up, I want to hit on the private capital advisory business and opportunity. I know you guys have made some senior additions there, and you highlighted that in the script. Just love to get a sense of how big of an addressable market you think that specific business is? I know it's important for just the firm level, but just how you think about the addressable market? How big of a business could this be for Moelis? It's pretty big at some of your peers, but is this a couple of hundred million dollar revenue opportunity? And then just how many more resources do you need to put there to get this business to where you think the potential is? Do you have now what you need? Or should we expect to see a lot more additions kind of follow after some of these senior hires?

Kenneth David Moelis, Chairman & CEO

I agree with you. We see it as a leadership position, potentially worth a few hundred million dollars or more. We believe we have hired the leadership capable of achieving that goal, and we have more hires to make across the organization, and we plan to be aggressive in this effort. We have not only hired one of the top players in the industry but three. We believe this could be very strong. Right now, it's worth a few hundred million dollars at the top of the market, possibly even more. Additionally, we feel we are in the early stages of a growth market, so we are quite optimistic about it. We consider it to be a significant component of the firm, reflecting the potential size of that market.

Navid Mahmoodzadegan, Co-Founder, Co-President

I should add that, in addition to the direct revenue opportunity that Ken outlined, having the capability in secondaries and continuation vehicles is very strategic for our discussions with private equity firms. It not only creates a revenue opportunity, but also supports our M&A business. This capability is critical for us to scale and perform strongly, and we believe we are well on the way to achieving that.

Operator, Operator

Next up is Ken Worthington from JPMorgan.

Kenneth Brooks Worthington, Analyst

Navid, thank you for your comments on your priorities. Ken mentioned that you're here to kind of usher in the next phase of growth for Moelis. What does this next phase of growth look like? What would you see your focus really being? Where are you paying attention most thoughtfully to? And what areas do you feel like you want to amplify as you think about this next phase of growth?

Navid Mahmoodzadegan, Co-Founder, Co-President

Sure. Well, look, I think the first comment is the strategy that we've been deploying for the last couple of years very much is the strategy that we've all been developing together that I expect to continue to carry on. So what are the elements of that? First, let's make sure that our investments are made in the highest total addressable markets, the biggest total addressable markets where we have the most opportunity to really drive revenue growth. That's why we did things like invest heavily in the technology group, oil and gas and now PCA and before that, capital markets. So we're going to continue to look for those big opportunities. Second, we want to make sure that we're attracting when we do lateral hiring, what I call difference makers, elite players who really move the needle with clients who bring franchises that we think are really accretive to our firm and to our global network. And making sure we're doing that and executing at the highest levels is going to be critical to our success. And then third, which is a really important pillar that helped build this firm is making sure that we continue to have the best culture, one where everyone is collaborating and kind of bringing the best of themselves to our clients and then making sure that this internal talent development engine that we're really proud of, where 40% of our managing directors are internally promoted MDs, including some of our highest producers, that this engine continues to operate at a very high level.

Kenneth Brooks Worthington, Analyst

And I think you and Ken both talked about the economy being in possibly the next leg of a strong period of growth. Do you increase the pace of investment and increase the pace of new hiring from what you have seen more recently? Or is it really about kind of leveraging the elevated pace of investments that you've really been focused on over the last two years and sort of letting things play out? Like which sort of scenario is more likely for you to pursue over the next 1 to 2 years?

Kenneth David Moelis, Chairman & CEO

We might either speed up or slow down, but overall, the pace should feel similar. We are going to accelerate efforts in areas like PCA, where you'll see us being very proactive in the private capital advisory group. Navid played a significant role in bringing in talent for the tech group, and that has proven to be extremely successful. The energy group we established in Houston has also been a tremendous success. In industrials, I anticipate we will maintain a similar level of activity. We will be very aggressive in specific areas, especially as we complete our private capital group. You can expect to see a consistent rate in the addition of managing directors in various parts of the organization, though it may seem quite aggressive due to our initiatives in PCA.

Navid Mahmoodzadegan, Co-Founder, Co-President

Yes. And I think the only thing I would add to that is, look, we're not growing for the sake of just growing and adding headcount. We want to make sure we're hiring the best people in the world to help us build these franchises. And sometimes that's not market-specific. It could happen in a down market where those people become available, like with technology, and it could happen in an upmarket. And I think what we've done is make sure we have the financial resources, a clean balance sheet to make sure we can do it under all environments, right? And so I think we want to lean into growth. As I said, big total addressable markets and great people. And sometimes that will happen in up markets and sometimes it will happen when the markets don't feel great, and that's why we keep the flexibility to do that.

Operator, Operator

The next question today comes from James Yaro, Goldman Sachs.

James Edwin Yaro, Analyst

I guess this is a question for both of you. There's a lot of focus on the market regarding the potential surge in M&A and IPO activity that could happen after Labor Day. What is your perspective on the post-Labor Day outlook? Do you really believe things could rebound that quickly in a significant way?

Kenneth David Moelis, Chairman & CEO

Things are definitely improving. The early part of June was interesting because there were hardly any deals happening between early April and a certain point. Many people were waiting. When you examine new business activity, it becomes clear that the deals that would have initiated in April began to register in our new business activity around late May and early June. We are witnessing a weekly strengthening throughout June as we move further away from Liberation Day. The S&P 500 is nearing 6,400, which reflects not just a recovery from Liberation Day but a notable increase. We haven't seen interest rates drop yet, and while I don’t expect a sudden large change, I do foresee the market improving steadily, provided there aren’t any external disruptions. The level of activity and the number of transactions people are willing to engage in is clearly on the rise, almost daily. So, while I don’t anticipate a dramatic shift, I do see a consistently improving market.

James Edwin Yaro, Analyst

Ken, I will say that one of the reasons I know you're an excellent banker that even though there's that loud fire truck there, you were still able to fill in those comments. So we appreciate that. And obviously, we'll miss you on the call.

Kenneth David Moelis, Chairman & CEO

I'm just making sure it wasn't an ambulance coming for me. That was the only thing that would have disturbed the whole thing.

James Edwin Yaro, Analyst

Exactly. Undisturbed, unperturbed. Okay. Great. Just one last follow-up here. So look, you're investing a lot in the private capital advisory, and that's growing fast right now. Maybe could you just help us think through the guardrails around the build-out as we head towards an environment that's potentially more characterized by regular way M&A and IPO, which I could imagine could at least slow the growth rate in secondaries.

Kenneth David Moelis, Chairman & CEO

We are very excited to have spent time with the senior leadership team, and we believe they are effective business builders. Currently, we are not operating with a large team, but we aim to grow if the market meets our expectations. We believe our product will remain relevant. As mentioned, when discussing assets in private equity and sponsorship, it's essential to provide various alternatives. In several cases, our solution will be one of those alternatives. While it may not always be the chosen option, it's crucial to deliver a clear execution plan to inform people of their choices effectively. We will follow their guidance, and at this point, we do not have excess capital or personnel in this area. My primary concern is ensuring we ramp up effectively by hiring the right people to execute our strategy. I remain optimistic about this product's potential growth in the coming years.

Operator, Operator

Your next question today is from Brendan O'Brien from Wolfe Research.

Brendan James O'Brien, Analyst

Just to start, you mentioned the strength in capital markets and advisory driving the growth year-to-date. However, I just wanted to drill down a bit on restructuring activity and just to get a sense as to how that has trended since April 2 and what your expectations are for that part of the business from here?

Kenneth David Moelis, Chairman & CEO

This year, it's remained relatively stable or slightly decreased. I anticipate that it will continue to decrease slightly. A contributing factor to this is that the positive developments in our capital markets and M&A are evident. In a strong market, when the S&P 500 reaches 6,300 and there is a significant influx of liquidity into private credit, companies that would typically need liability management or restructuring are instead being acquired in M&A deals or refinanced. We have always aimed to connect our capital markets with our restructuring business in our financial reports because I believe there's a connection. Most CEOs and CFOs I know would prefer financing over restructuring. Therefore, with abundant capital available, what would have been identified as restructuring or liability management revenue in a weak market is now shifting towards capital markets or M&A.

Brendan James O'Brien, Analyst

Helpful color. And then I guess for my follow-up, I just wanted to touch on the comp ratio. You've had a really strong first half, and it sounds like momentum should build from here. However, as you mentioned, you've been aggressively and will continue to aggressively lean into recruiting as you build out the PCA business and your deferred comp amortization was up over 40% year-on-year in Q1. While I understand the investment will pay off over time, I just want to get a sense as to how we should think about your ability to flex your comp ratio as the revenue backdrop begins to improve.

Kenneth David Moelis, Chairman & CEO

I believe we will have the flexibility, and it all depends on top-line performance. The growth we have built into the company through our investments is quite significant. We didn't make any changes because I don't think one quarter provides enough evidence to warrant constant adjustments. It can lead to unnecessary fluctuations. Therefore, we chose to keep the compensation ratio as it is. We expect the year to progress positively and feel there is still plenty of time. We simply didn't find the evidence from one quarter sufficient to justify fine-tuning at this moment. We will address that in the latter half of the year.

Devin Patrick Ryan, Analyst

Congrats, Navid, on the new role and Ken, congrats on the new role as well. You'll be missed.

Operator, Operator

And at this time, there are no further questions. That does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect.

Kenneth David Moelis, Chairman & CEO

Thank you.