Hennessy Advisors, Inc. — Q3 FY2020 Form 10-Q
Reporting period: Fiscal quarter and nine months ended June 30, 2020. The company provides investment advisory and shareholder services to 16 open-end mutual funds; fees are primarily based on funds’ average daily net assets. Financial amounts below are in millions of dollars unless otherwise noted.
Financial performance and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Total revenue | $6.895 vs. $10.442 in 2019; down 34.0% | $26.018 vs. $32.542; down 20.0% |
| Net operating income | $2.283 vs. $3.939 | $9.007 vs. $12.502 |
| Operating margin | 33.1% vs. 37.7% | 34.6% vs. 38.4% |
| Net income | $1.775 vs. $2.657; diluted EPS $0.24 vs. $0.34 | $6.373 vs. $8.624; diluted EPS $0.86 vs. $1.10 |
| Operating cash flow | Not separately reported | $8.012 vs. $10.220 |
At June 30, cash and cash equivalents were $8.708, current assets $11.818, and current liabilities $4.469. The company had no debt after repaying its term loan in full on March 26, 2020, for an aggregate $15.4 million. Total assets were $93.310 and stockholders’ equity was $77.565. Cash dividends declared were $0.14 per share for the quarter and $0.41 for the nine-month period.
Material changes and drivers
- Revenue fell as average fund assets declined, primarily because of net outflows and, in the March quarter, COVID-19-related market depreciation. Average assets under management for the June quarter were $3.45 billion, down 32.2% year over year.
- Assets under management ended June at $3.49 billion, down 30.3% from $5.01 billion a year earlier. In the quarter, $104.7 million of organic inflows were more than offset by $471.1 million of redemptions; market appreciation added $538.2 million.
- Operating expenses declined in dollars, but increased as a share of revenue: 66.9% for the quarter and 65.4% for the nine months. Management cited fixed costs that did not fall in line with revenue. Quarterly expenses also benefited from reduced travel and conference activity.
- Interest expense was zero in the June quarter, versus $0.257 million a year earlier, following the March loan repayment. Nine-month interest expense was $0.447 million, down from $0.866 million.
- Nine-month effective tax rate was 26.3%, compared with 27.5% in 2019, partly reflecting a reduction in disallowed executive compensation under Section 162(m).
Outlook, risks, and notable items
- Management said cash and other liquid assets should meet capital requirements for at least one year from the report’s issuance. It noted that additional borrowing or capital-market funding could be considered for longer-term needs, with no assurance of availability.
- No numerical earnings or revenue guidance was provided. Management said it remained focused on fund performance, investor service, asset retention, organic inflows, and potential acquisitions.
- COVID-19’s duration and financial effects remained uncertain. The filing identifies risks to markets, fund assets, redemptions, revenue, operations, and personnel. The company moved employees to remote work and reported continuing operations and internal controls in that setting.
- Executives voluntarily took temporary 25% salary reductions from May 1 through September 30, 2020. The company suspended stock repurchases as of March 24, 2020; it had repurchased 270,896 shares during the nine months.
- Management reported no impairment of the $80.6 million carrying value of management contracts as of June 30. The filing reported no material subsequent events and no material changes to previously disclosed risk factors other than the added COVID-19 risk.
Key facts for investors to verify
- Whether fund performance, redemptions, and net flows support stabilization or further declines in assets under management and fee revenue.
- How much of the recent AUM movement reflects market returns versus ongoing investor flows, particularly in the largest funds.
- Whether operating costs can adjust if revenue remains pressured, and the effect of temporarily reduced executive compensation after September 30.
- The durability of cash generation and liquidity after the $15.4 million debt payoff, dividends, and prior share repurchases.
- Whether COVID-19 developments or fund performance could trigger further material changes to revenue, liquidity, or management-contract valuations.