Silvercrest Asset Management Group Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Silvercrest provides investment management and family-office services. Unless stated otherwise, financial figures are in millions; AUM is in billions. Results are unaudited.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Total revenue | $28.4 | $22.6 |
| Management and advisory fees | $27.4 | $21.6 |
| Family-office services revenue | $1.0 | $1.0 |
| Net income | $9.7 | $3.0 |
| Net income attributable to Silvercrest | $5.5 | $1.7 |
| GAAP diluted EPS | $0.59 | $0.20 |
| Net income margin | 34.2% | 13.5% |
| Adjusted EBITDA and margin | $8.2; 29.0% | $5.8; 25.5% |
| Operating cash flow | $(15.1) | $(20.9) |
| Cash and cash equivalents | $32.8 | $52.8 at Dec. 31, 2019 |
| Term-loan borrowings | $15.3 | $16.2 at Dec. 31, 2019 |
| Total liabilities | $85.4 | $116.4 at Dec. 31, 2019 |
| Period-end AUM | $20.6 | $20.8 at Mar. 31, 2019; $25.1 at Dec. 31, 2019 |
Q1 cash decreased by $20.1 million. Investing activities used $0.2 million and financing activities used $4.8 million. The company reported no revolver borrowings and said it complied with credit-facility covenants at quarter-end. It stated that operating cash and existing liquidity were expected to fund operations and commitments over the next 12 months, while noting that COVID-19 effects were difficult to predict.
Changes versus the prior comparable period
- Revenue rose 25.7%, mainly reflecting growth in discretionary managed-account fees, including the contribution from Cortina, acquired in July 2019. Cortina contributed $2.9 million of Q1 2020 revenue.
- Period-end AUM fell from $25.1 billion at the start of 2020 to $20.6 billion, a 17.9% decline, primarily from $4.6 billion of market depreciation, partly offset by net client inflows. The filing says the Q1 revenue largely reflected prior-quarter asset values, so market declines during Q1 were expected to affect Q2 revenue.
- Total expenses declined 15.2% to $15.8 million. Compensation and benefits rose 17.5% to $15.7 million, while general and administrative expense fell to $43,000 from $5.2 million. The latter decrease was largely due to a $6.0 million favorable fair-value adjustment to Cortina contingent consideration, partly offset by other costs.
- Net income rose sharply, but the comparison reflects the unusual Cortina earnout fair-value adjustment. Adjusted EBITDA, a non-GAAP measure, increased 43.0%; adjusted EPS was $0.36 versus $0.24.
- Operating cash use improved from the prior-year quarter but remained substantial, reflecting cash payments including accrued compensation and other working-capital movements. Class A dividends were $1.5 million, or $0.16 per share, versus $1.3 million, or $0.15 per share.
Outlook, commentary, risks and unusual items
- No specific quantitative earnings or revenue guidance was provided. Management said COVID-19 was affecting Q2 operations and could continue to do so; the duration and financial effects remained uncertain.
- Management warned that revenue is highly correlated with securities markets and expected market effects to pressure AUM and revenue. Most advisory fees are billed in advance using prior quarter-end asset values, making the Q1 AUM decline relevant to Q2 revenue.
- The company continued operating remotely and reported that business-continuity plans were activated. Management said demand for services continued at the filing date, but might weaken depending on the pandemic and economic conditions.
- The $6.0 million favorable Cortina earnout remeasurement materially reduced reported general and administrative expense. A separate $83,000 unfavorable Cappiccille earnout adjustment was recorded. The tax provision included $1.1 million of discrete tax expense associated with the Cortina adjustment.
- The company reported no goodwill impairment in the quarter. The filing identifies risks including market declines, client withdrawals, competition, retention of clients and investment professionals, operational and cybersecurity risks, regulatory costs, and credit-facility compliance. It also disclosed a $9.9 million estimated Tax Receivable Agreement liability.
- The revolving credit facility was scheduled to mature June 19, 2020; the filing describes that maturity date but provides no subsequent amendment or extension information.
Investor facts to verify
- Subsequent AUM, net flows and market performance, and the resulting effect on Q2 and later advisory-fee revenue.
- How much of reported earnings growth depended on the Cortina contingent-consideration fair-value adjustment, and the remaining earnout exposure.
- Cash generation after compensation and partner distributions, and the company’s liquidity and debt position following the quarter.
- Status of the revolving facility after its disclosed June 19, 2020 maturity, and continued compliance with debt covenants.
- Actual COVID-19 effects on client retention, operations, expenses and demand, which management said could not yet be reliably quantified.