Evercore Inc. (EVR) Earnings Call Transcript

Our EMEA Strategic Advisory business delivered another strong quarter with our expanded presence in the region, resulting in record year-to-date revenues. Our strategic defense and Shareholder Advisory Group continues to see strong activity supported by elevated levels of shareholder activism. Globally, in the third quarter and into October, we advised on a number of significant transactions, including PTC on its $24 billion sale Schneider Electric GE Aerospace on its $11.75 billion acquisition of consolidated precision products, easyJet on its [5.6 billion pound] sale to Apollo, Sadr on its all-share combination with Prologis, Nexus data centers on the $15.6 billion construction financing of its inaugural data center and power development project. Broadcom on a transaction enabling the deployment of $63 billion of AI compute capacity to Anthoropic, which announced earlier this week. Consistent with trends in the first half, our liability management and restructuring business maintained strong activity levels as companies continue to address upcoming debt maturities and particularly in a higher interest rate environment. Our private capital markets and debt advisory business is seeing growing levels of activity in innovative financing solutions supporting the expansion of digital infrastructure over the last year, as highlighted by several of the deals I just mentioned. Our market-leading private capital advisory and fundraising businesses, respectively, saw positive trends in the quarter, consistent with earlier in the year. Our Equity Capital Markets business had a strong quarter, supported by a more constructive IPO market earlier in the quarter our equities business generated solid revenues. Evercore ISI achieved the #1 ranking on a weighted basis in Extel's All-American Research Analyst survey for the fifth consecutive year. And finally, our wealth management business ended the quarter with AUM of $16.2 billion and maintains a strong long-term performance. Before I turn it over to Tim, I want to take a moment to reiterate a few important points about Evercore's position and the opportunity ahead. Over the past decade, we've expanded and diversified our platform across products, sectors, geographies and client segments, broadening the opportunities to serve clients while maintaining our strong focus on culture. While advising on many of the world's largest and most transformative M&A transactions is core to our strategy, our franchise extends across the full spectrum of the market with respect to both size and transaction type. Specifically, we've made significant investments in expanding our financial sponsor coverage over the last several years. Today, across our financial sponsors coverage and private capital related businesses -- we have over 60 senior bankers specifically covering this important client segment working closely with our sector bankers. As we continue to build out the firm we have similarly expanded our middle market coverage by investing in high-quality bankers across sectors where we see significant opportunity, including recently in our Aerospace and Defense, logistics, health care, and services sectors. We believe we are now well positioned to take advantage of this part of the market. We also remain focused on hiring additional product specialists which is something we've been executing on over the last several years. At the same time, we've continued to diversify our revenue base beyond M&A, building successful businesses across a range of other areas. Even with significant growth in M&A, non-M&A businesses have contributed more than 40% of firm-wide adjusted net revenues over the last 4 quarters providing greater diversification and resilience across market cycles. This growth has been supported by significant investment in our people. Our investment banking SMD base has grown nearly 70% since 2021, while productivity remains at market-leading levels. And it is important to note that we have more than 50 SMBs still ramping representing meaningful opportunity for future growth, and we continue to have a robust recruiting pipeline. Together, these investments have meaningfully expanded our addressable market strengthened our competitive position and contributed to significant market share gains. Our results this quarter reflect the collective strength of our platform, our people and the strong momentum across our businesses. We believe substantial opportunity lies ahead and the Evercore is well positioned for the next phase of gross. With that, let me turn it over to Tim.

Thank you, John. Evercore's third quarter results reflect strong performance across our diversified mix of businesses. For the third quarter of 2026, net revenues, operating income and EPS on a GAAP basis were $1.2 billion, $243 million and $3.93 per share, 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. Our third quarter adjusted net revenues of nearly $1.2 billion increased 13% year-over-year. This marks Evercore's 6th consecutive quarterly revenue record. Year-to-date, we have generated record adjusted net revenues of $3.6 billion, up 38% from the prior year period. Third quarter adjusted operating income of $270 million increased 18% [Technical Difficulty] to 2025. Adjusted earnings per share of $4.28 and was a record for the third quarter and increased 23% year-over-year. For the 9 months, our adjusted EPS is up 57% compared to the prior year 9 months. Turning to the businesses. Record third quarter adjusted advisory fees of $1 billion increased 14% versus last year's record third quarter. This performance reflects continued market share gains, increased productivity per SMD and a higher number of fee events. Based on our record backlog and other early indicators, we expect activity levels to remain strong. Our third quarter underwriting revenues were $56 million, up 27% from a year ago, driven by healthy IPO activity. Commissions and related revenue of $61 million was down 4% year-over-year amid lower volatility and industry-wide trading volumes. Third quarter adjusted asset management and administration fees of $26 million rose 9% year-over-year. Third quarter adjusted other revenue net was approximately $25 million, of which approximately $23 million was from interest income. Turning to expenses. The adjusted compensation ratio for the third quarter is 63%, down 200 basis points from the prior year period and down 50 basis points from last quarter, marking significant improvement on both an annual and quarterly basis, [Technical Difficulty] further revenue growth and improvement in the compensation ratio over time. So equity market sentiment can change quickly and somewhat frequently, we believe the building blocks for a constructive M&A market, such as CEO confidence levels, financing availability, industry disruptions and compelling strategic rationale remain in place. Adjusted noncompensation expenses in the quarter were $166 million, representing an adjusted noncomp ratio of 14.1%, which is down 340 basis points from last quarter. The second quarter's adjusted noncomp ratio was higher due to a combination of an investment in growth and some seasonal or episodic costs. The stronger adjusted net revenues this quarter also played a role in the improvement in the ratio. As discussed on our last quarter call, similar to revenues, noncomp expenses and ratios are best evaluated across multiple quarters. Our year-to-date adjusted noncomp ratio is 13.7%. The increase in non-comp costs compared to the prior year was primarily driven by investments in technology, including AI initiatives, which we believe will result in increased future productivity and efficiencies, travel and related expenses, which are correlated with client activity and our investment in our near-term results, and search and placement fees related to hiring, which is an investment in growth. The higher level of increase in noncomp expense seen in the last 3 years supported the doubling of our business as our adjusted net revenues have increased from $2.4 billion in '23 to approximately $4.9 billion in the latest 4 quarters. Over that same period of time, our noncomp expense ratio has declined from 16.6% and to 13.7% year-to-date. We are striving to achieve a lower growth rate in noncomp expense over the next several years. Our adjusted tax rate for the quarter was 28.5%, down slightly from the third quarter of last year. Turning to our balance sheet. As of September 30, our cash and investment securities totaled approximately $2.8 billion, up from $2.4 billion a year ago. During the quarter, we returned $189 million of capital to shareholders through share repurchases and dividends, including the repurchase of approximately 520,000 shares at an average price of $291.60. This represented a record level of capital returned for a third quarter. Through the first 9 months of the year, we returned over $1 billion to shareholders through share repurchases and dividends, exceeding the amount returned in any prior full year in the firm's history. We remain committed to returning capital to shareholders while maintaining a strong and durable balance sheet, allowing for financial flexibility to support continued investment in our business. Lastly, our third quarter adjusted diluted share count was 43.5 million shares, down nearly 1.2 million shares year-over-year. We are pleased with our record performance through the first 9 months of this year. While we remain mindful of market uncertainty, we are optimistic about Evercore's medium- and long-term growth prospects. With that, we will now open the line for questions.

We will now conduct the question-and-answer portion of the conference. [Operator Instructions] Our first question today comes from Mike Brown with UBS.

And Mike, just 1 second. First, just we apologize our understanding is that there was an issue with the connection to the webcast. We very much apologize for that. The replay as well as the transcript should be posted a live just right after this call. So again, once we very much apologize for the inconvenience. Michael, I'll turn it back to you.

Great. Just wanted to maybe start on the large-cap strategic M&A. That's been a key area of strength this year as you talked about in the prepared remarks. I guess intuitively, there's maybe a finite number of transactions that can play out in that space. So just curious how you think about, is it possible to continue to see growth from this cohort here? Because obviously, the U.S. regulatory backdrop remains quite favorable. So maybe can you talk about your confidence that activity can continue to accelerate from here. Maybe just touch on what your view is in terms of the inning that we're in, in terms of large cap M&A cycle.

Thanks, Mike. Well, it's always difficult to call a cycle. Having said that, what we can tell you is what we're seeing in our business. And what we see is that we have record backlogs. Our replenishment rates are very healthy. And client engagement is really at a very high level. We're feeling very, very good about really our client engagement and our breadth of engagement with respect to across all of the different sectors. We expect activity to remain healthy into next year. The building blocks are in place for really the continued strength in the merger market. Those building blocks as we've talked about many times in the past are the CEO confidence level, access to capital, healthy equity markets and really strategic impetus -- so from our perspective, we see that strength will continue, and we feel good about the prospects going forward.

Our next question comes from Jim Mitchell with Seaport.

So SMD head count is up 32% over the past 2 years. you've got more than 50 SMDs in ramp mode. So assuming the ramping SMDs can kind of match average productivity of the more seasoned bankers how should we think about the amount of revenue productivity that remains to be generated out of that group? Is it sort of 2/3 half? Just any kind of help on how much productivity you expect in S&D cohort?

Yes. Sure, Jim. Happy to address this. So as you think about the (, you could get a sense probably from our press releases and so forth, about when they started. And then the way we normally think about it is it's difficult to do, given when people arrive during the course of the year, difficult to do much revenue at all in that first, what I would call, stub year. second year, which is that maybe their first full year, you could expect to see them at, let's call it, of 50% to 2/3. And then by the second full year, they should be fully ramped. And so if you look at our revenue per partner productivity statistics over the last 5 years, the average has been about $22 million. It's been particularly good so far in the last 4 quarters at about $27.3 million. And so -- and by the way, just as a side note, what I might say is that's especially encouraging to me, given the rates at which we've grown our SMD head count to be able to do so and retain those high and actually growing levels of productivity while we're doing it.

We'll go next to Brennan Hawken with BMO.

Tim, the -- what's the right way we should be thinking about comp ratio for the year? I know you've spoken about last comp leverage than the preceding years. When we look at the year-to-date, you're at 63.5%, I believe, on an adjusted basis, does that align with your expectations? Or should we be more centered or focused on what you just printed here in 3Q as an indicator. I know sometimes it can switch.

Yes. Sure, Brennan. And thanks for the question. We I'd just like to remind our investors, in 2023, it was -- the comp ratio was 67.6%, then we brought it down to 65.7% in '24, 64.2% and '25. And then this year, as you correctly mentioned, year-to-date comp ratios on an adjusted basis, 65%. But what we booked for this quarter -- or pardon me, 63.5%. And about what we booked for this quarter is 63% and so we have made a pretty substantial progress. From an accounting standpoint, if you look at our year-to-date, that would reflect an accrual. That's our best estimate of the full year, although what I would note is we continue to strive hard to reduce that, and I'm encouraged by the progress I've seen recently and hopeful that we can make additional progress.

We'll go next to Steven Chubak with wolfe research.

So I wanted to double click into the digital infra opportunity. The Broadcom been advisory mandate, certainly encouraging to see just given the market perception that the M&A independents are not as well positioned to participate in the digital infra capital markets fee pool, given the inability to expand balance sheet. And given the magnitude of financing activity as anticipated to support the build and expectations for issuance activity to remain elevated at least for the next 5-plus years. I was hoping you could speak to how the debt advisory backlog is trending? And how would you frame the size of the revenue TAM for which you can compete?

Well, from our perspective, really our capability in terms of driving infrastructure finance and really thinking about the advisory on debt financing and liability has really been somewhat of a new muscle for us, and we've built it out extensively over the last 2 or 3 years. And we're feeling really good about it. As you said, the Broadcom deal was something that really was a very strong deal. I think we're very happy with that result. We have driven Nexus data centers, a $15.6 billion financing of its inaugural data center. And it's to really pronounce their power. We see a number of these activities and these opportunities coming down the pike. I wouldn't really give you projection as to where we're going to be on that other than to say the fact that we're able to do this, and we are starting to really build momentum, it's clear that really people are looking to Evercore and our brand and really the way we do a business that you can assume that there is a significant buildup of possibilities and activities and we're in the middle of looking at a lot of those. And so you should just assume that, that better is going to grow that we feel that we've really built that area well with very strong people and we think it's going to be a very high potential area for us going forward.

We'll go next to Devin Ryan with Citizens Bank .

The question on kind of the connection and financial sponsor investments and private capital coverage? And then also some of the commentary on the investments into the middle market coverage, which I know are active for sponsors. If you can unpack just a little bit more around kind of 2 things. One, it sounds like you're seeing activity picking up with sponsors. So is that just a market comment? Or do you think that's an Evercore-specific comment from your initiatives? And then the bigger picture question is just around the middle market initiatives and how that can expand the opportunity for Evercore the connection to doing more with sponsors? And really just what the objective is in moving more into the middle markets?

Thanks, Devin. Well, clearly, sponsors is picking up slowly in the general market. There is a trend upward, but it is slow. We feel like we're seeing above-market volume build because we spent a tremendous amount of effort and time really thinking about how do we cover sponsors, how do we leverage off of all the capabilities we have, how do we make sure that we are, in effect, driving our connectivity with relationships. And so I think probably we're ahead of that and going forward. As we said, what's really happened is we cover sponsors better and we're really, in effect, able to satisfy more of their needs. Having said that, your question was also about the middle market and our build there. And really, that's been a pretty comprehensive effort over a number of years now for us. And just recently, we've added 2 very senior people in A&D who are very, very fast with respect to middle market area and covering. We've really added in the business services. We've added in logistics. And we continue to see people who are in these areas who want to come over because our platform is strong, and they're able to do a lot of things. I mean, I think that 1 of the things I think we've really been able to build as a firm is we have such strong product capability that access to more clients is really going to drive more revenues. And we're seeing that. And so we see middle market being a very strong area of growth for us going forward. And I think that you're going to see more investment. As you've seen from us, what we do is we find areas which we think are good and solid growth areas, and we invest in those. And that's what we're going to do with middle market. So you're going to see that area grow.

Yes. The only thing I would add to that is just to reiterate a point that John made in his prepared remarks, which is that in the financial sponsor senior bankers across both our financial sponsor converses covering this, which I think is probably a lot more than what people might assume that we've seen our pitch activity has increased, and our win rate has strengthened. And so we are pleased with the progress we've seen in that area. And then as John said, we certainly have made an intentional and concerted effort to broaden our reach in the middle market as well and feel like we're an area than we would have been just a few years ago.

Yes. It's certainly an area of focus and investment for us.

[Operator Instructions] We'll go next to James Yaro with Goldman Sachs.

I wanted to touch on a little bit of a question -- a high-level question here. Could you just speak to the impact of whether currently more financing heavy capital markets activity is impacting independent adviser for market share temporarily? And more broadly, has the structural market share gain story among independent advisory firms changed more recently versus, let's say, the prior roughly 15 years or so?

Well, let me answer that question a little bit more narrowly because I'm going to really answer it from Evercore's perspective and then maybe you can extend it beyond, which is -- from our perspective, we do see that there is more activity and much larger activity going forward and the financing is a big part. As you have seen, we've really built out our capabilities there. And the way we think about the extent of our business or the limits of our business is, it really, really has to do with the clients we're covering and the way we're able to really access the opportunities with those clients. we're seeing multiple opportunities going forward. We've built a significant financing effort and expertise. And so what we're seeing is real opportunity. And so we actually are looking at the landscape right now and saying it's wide open for us. And I think that maybe it's because we do cover larger clients, we have been some of the other independents we certainly have a larger merger business than many. And so I think what we're looking at is really driving that and also using the financing capabilities that we've generated to really take advantage of the opportunity set. So James, from our perspective, we are seeing multiple opportunities, and we feel like we're in a very good position. In terms of the broader landscape, couldn't really say. Certainly, we have competitors out there who are very capable. So I anticipate that a lot of them are going to see some of the benefit of this growth also.

Right. Just to put a little bit of detail on some of what John said, we do track what we consider to be a form of market share, which is just the advisory revenues of all the publicly traded investment banking firms that report advisory revenues. And based on that, I feel like Evercore has perhaps outperformed on that measure. And in fact, would rank right in the mix, if not above the market share gains you've seen by the bulge bracket firms.

Our next question comes from Alex Bond with KBW.

Just wanted to follow up on some of the commentary around the noncomp side. I think last quarter, Tim, you had spoken to your expectation that the year-over-year increase there on the non-comp expense side would be up modestly relative to last year. Is that still the case? And then maybe just a quick 1 on 3Q revenues. I think you had also mentioned that over the trailing 12 months, the non-M&A contribution was roughly 40% for -- in the advisory line. Was that the case in 3Q specifically? Or was that a little bit higher?