TROW

Business Context and Reporting Period

Company: T. Rowe Price Group, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2007
Business Overview: The Company derives revenues primarily from investment advisory services provided to individual and institutional investors in sponsored mutual funds and other portfolios. It also provides administrative services, including transfer agent, accounting, and recordkeeping services. As of March 31, 2007, international clients accounted for more than 7% of assets under management (AUM).

Key Financial Metrics

Assets Under Management (AUM): $349.9 billion at March 31, 2007 (up 4.5% or $15.2 billion from the prior quarter). Average AUM for the quarter was $343.6 billion.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 18% ($79.1 million) driven by a 20% increase in investment advisory fees. This was primarily due to a $61.6 billion increase in average AUM.
• Profitability: Net income rose 22% ($26.2 million) to $142.9 million. Diluted EPS increased 21% to $0.51.
• Expense Increases: Operating expenses rose 15% ($38.7 million) to $289.5 million. The largest driver was compensation and related costs, which increased $24.2 million due to higher staff levels (up 3.5% to 4,765 associates), base salary increases, and an $8 million increase in interim bonus accruals.
• Cash Flow: Net cash provided by operating activities increased 33% to $241.7 million. Net cash used in financing activities increased significantly to $42.8 million, largely due to $23.2 million in common stock repurchases and higher dividend payments.
• Balance Sheet: Total assets increased by $192.1 million, while total liabilities increased by $70.2 million, primarily due to higher income taxes payable and accrued compensation.

Guidance, Outlook, and Risks

• Market Outlook: Management noted modest market performance in Q1 2007 (S&P 500 return of 0.6%) with uncertainty regarding the U.S. economy, energy costs, and the housing market. The Federal Reserve target rate remained at 5.25%.
• Expense Guidance: Advertising and promotion expenditures are expected to be up approximately 10% in Q2 and for the full year 2007 compared to 2006. Anticipated capital expenditures for property and equipment in 2007 are estimated at $145 million.
• Tax Rate: The estimated effective tax rate for the full year 2007 is 38.0%, up from a prior estimate of 37.7% due to a higher anticipated state income tax rate.
• Risks: Future results depend heavily on AUM levels, which fluctuate with market performance and investor inflows/outflows. Risks include competitive conditions, regulatory changes, and the potential for independent directors of mutual funds to alter or terminate management agreements.
• Legal Proceedings: A class action lawsuit regarding market timing in the International Stock Fund is pending; management believes the likelihood of a material adverse effect is remote.

Investor Verification Checklist

• AUM Composition: Verify the breakdown of net inflows ($9.6 billion total) versus market appreciation ($5.6 billion) to understand the sustainability of revenue growth.
• Compensation Trends: Monitor the $8 million increase in interim bonus accruals and the 7% increase in average staff size to assess future operating leverage.
• Share Repurchases: Confirm the impact of the $23.2 million in stock repurchases on diluted share count and future EPS.
• Fee Rates: Note that the average fee rate remained stable at 50.2 basis points; verify if this stability holds as AUM grows.
• Legal Exposure: Review the status of the T.K. Parthasarathy class action lawsuit regarding market timing allegations.