Business context and reporting period
Hennessy Advisors, Inc. filed this unaudited Form 10-Q for its fiscal third quarter ended June 30, 2023. The company advises 16 mutual funds and one ETF, and provides shareholder services to mutual-fund investors. Revenue is primarily based on funds’ average daily net assets (AUM). Financial amounts below are in millions of dollars unless otherwise stated.
Financial performance and position
| Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Nine months ended June 30, 2023 | Nine months ended June 30, 2022 |
|---|---|---|---|---|
| Revenue | $5.70 | $6.91 | $17.76 | $23.19 |
| Net operating income | $1.38 | $2.33 | $4.58 | $7.79 |
| Net income | $1.12 | $1.30 | $3.43 | $4.82 |
| Diluted EPS | $0.15 | $0.17 | $0.45 | $0.63 |
| Operating margin | 24.2% | 33.7% | 25.8% | 33.6% |
| Net margin | 19.6% | 18.8% | 19.3% | 20.8% |
For the nine months ended June 30, operating cash flow was $4.65 million, investing cash outflow was $0.66 million, and financing cash outflow was $3.07 million. Cash increased $0.91 million to $59.40 million. The investing outflow included payments related to management contracts; financing outflow primarily reflected dividends.
At June 30, 2023, total assets were $144.40 million, current assets $62.32 million, and current liabilities $3.49 million. Notes payable, net of issuance costs, were $39.09 million; the notes have $40.25 million principal, bear interest at 4.875%, and mature December 31, 2026. Stockholders’ equity was $87.43 million. Management stated cash and liquid assets should cover capital needs for at least one year from the report’s issuance.
Material changes versus the prior comparable period
- Quarterly revenue fell 17.5%; nine-month revenue fell 23.4%. Advisory fees declined 17.9% for the quarter and 24.1% year to date, primarily reflecting lower average AUM. Shareholder service fees also fell as Investor Class AUM declined.
- Ending AUM was $2.96 billion, down 6.1% year over year, with net outflows partly offset by market appreciation. Quarterly average AUM was $2.85 billion, down 17.1% year over year. In the quarter, inflows of $134.1 million were outweighed by redemptions of $177.7 million.
- Quarterly operating expenses declined 5.7% to $4.32 million, but rose to 75.8% of revenue from 66.3%; nine-month expenses declined 14.4% to $13.18 million, but increased to 74.2% of revenue from 66.4%. Lower expenses did not offset the revenue decline, and operating income and net income decreased.
- Interest income rose to $0.71 million for the quarter and $1.76 million year to date, from $0.02 million in each prior-year period, due to higher interest rates. This helped limit the decline in pretax income.
- Management received approximately $0.3 million plus accrued interest in Employee Retention Credit proceeds in May 2023, recorded as a reduction to payroll expense.
Outlook, commentary, risks and unusual items
Management provided no specific financial guidance. It expects available cash and liquid assets to be sufficient for near- and longer-term capital requirements, while noting additional capital may be sought if needed and cannot be assured. Its stated strategy emphasizes acquiring and integrating funds and organic growth through asset retention and inflows. Management highlighted investor redemptions, fund performance, market conditions, interest rates, inflation, competition and regulatory developments as factors affecting results; it expects regulatory requirements to increase administrative and compliance costs.
The company signed an agreement to acquire management-related assets for two Community Capital Management equity funds, with payment at closing equal to 1.25% of the funds’ aggregate NAV. It expected closing during calendar 2023, subject to customary conditions including shareholder approval, and capitalized $0.1 million of related legal costs during the period. The Stance ETF acquisition completed in December 2022 added approximately $43 million of AUM at closing.
After quarter-end, a July 14, 2023 change of control terminated the Stance ETF sub-advisory agreement with VIA. A new agreement with Vident Advisory was approved by the ETF’s shareholders and the Funds’ Board; ETF shareholders also approved a “manager of managers” structure. The company was evaluating implementation for other sub-advised funds. Sub-advisor disruption or termination could reduce fund AUM and company revenue. No other material changes to previously reported risk factors were identified. Management reported disclosure controls were effective and no material internal-control changes during the quarter.
Important facts for investors to verify
- Whether AUM outflows continue, particularly in the Focus Fund, and how fund performance and redemptions affect fee revenue.
- Progress, closing conditions and final consideration for the CCM fund transaction, including its expected contribution to AUM and earnings.
- Effects of the Vident Advisory transition and any broader adoption of the manager-of-managers structure.
- Ability to sustain profitability and dividends if average AUM and revenue remain below prior-year levels; the company declared a $0.1375-per-share quarterly dividend.
- Cash generation, liquidity and servicing of the $40.25 million notes through their 2026 maturity, including the company’s optional redemption rights beginning December 31, 2023.
- Management-contract asset valuation and impairment assumptions; the $81.22 million carrying value was not impaired based on management’s June 2023 qualitative assessment.