Business context and reporting period
T. Rowe Price Group, Inc. is an asset manager whose revenue depends primarily on advisory fees tied to assets under management (AUM). This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods unless otherwise noted.
Financial performance and position
| Metric | Third quarter 2015 | Nine months 2015 |
|---|---|---|
| Net revenue | $1,049.0 million, up 2.8% | $3,148.4 million, up 6.4% |
| Net operating income | $458.3 million, down 6.2% | $1,443.9 million, up 2.3% |
| Net income | $277.1 million, down 8.7% | $919.8 million, up 0.7% |
| Diluted EPS | $1.06, down 5.4% | $3.45, up 2.4% |
| Operating margin | 43.7%, versus 47.9% | 45.9%, versus 47.7% |
| Average AUM | $763.1 billion, up 3.2% | $768.6 billion, up 6.8% |
Investment advisory fees rose 3.6% in the quarter and 7.3% year to date, reflecting higher average AUM and a modestly higher average fee rate of 48.0 basis points. Quarter-end AUM was $725.5 billion, down $47.5 billion from June 30 and $21.3 billion from year-end 2014; third-quarter market depreciation of $46.8 billion was the primary driver, while net flows after client transfers were negative $0.7 billion.
Operating cash flow was $1,371.5 million for the first nine months, versus $1,216.1 million in 2014. Investing activities used $48.6 million; financing activities used $1,664.6 million, including $927.2 million in dividends paid and $820.7 million in share repurchases. Cash and cash equivalents were $1,164.4 million at September 30, down from $1,506.1 million at year-end. The company reported $3.0 billion in cash and sponsored investment holdings, no debt, and no external liquidity facility. Total assets were $5,266.6 million and stockholders’ equity was $4,673.6 million.
Material changes versus the prior period
- Third-quarter revenue growth did not translate into higher operating income: operating expenses increased 11.0%, outpacing revenue growth of 2.8%. Compensation costs rose 9.5%, and technology, facility, and other operating costs also increased.
- Year-to-date revenue grew 6.4%, but expenses rose 10.1%; operating margin declined 1.8 percentage points and net income increased only 0.7%.
- Non-operating investment income declined to $0.3 million in the quarter from $5.2 million, and to $60.1 million year to date from $73.4 million. The quarter included a $4.8 million other-than-temporary impairment and a $5.8 million currency loss reclassified upon deconsolidation of a sponsored fund.
- Cash returned to shareholders increased substantially: the company declared a $2.00-per-share special dividend in 2015 and increased its regular quarterly dividend 18%. Year-to-date repurchases totaled $820.7 million in cash-flow reporting; 11.2 million shares were repurchased since year-end, reducing shares outstanding by about 4%.
Outlook, commentary, and risks
Management did not provide formal earnings guidance. It estimated a full-year 2015 effective tax rate of about 38.9%, expected approximately $170 million of 2015 property and equipment expenditures, and anticipated advertising and promotion costs about 5% above 2014. Money-market fee waivers were expected to continue through the remainder of 2015 and into 2016; $11.6 million was waived in the third quarter.
Management said it plans continued investment in investment talent, products, technology, service capabilities, and global distribution. The transition of certain administrative services to BNY Mellon began in August, when 210 associates transferred. Management did not expect the transition’s overall effect on future operating results to be material, though related revenue and expense lines may change.
Key risks include market declines and changes in AUM composition, client flows and investment performance, fee pressure, competition, compensation and technology costs, regulation, and reliance on third-party service providers. Management noted that adverse claims in the ordinary course of business were considered remote to have a material effect. The filing reported no material change in previously disclosed risk factors or market-risk disclosures. KPMG reviewed the interim statements; this review was substantially less in scope than an audit.
Important facts for investors to verify
- Whether market movements and client flows continue to pressure ending AUM and advisory-fee growth.
- Whether expense growth moderates and operating margins recover as planned investments and the BNY Mellon transition progress.
- Whether money-market fee waivers, the estimated tax rate, capital spending, and advertising-cost expectations remain consistent with management’s stated outlook.
- How sponsored-fund valuations, impairments, and the expected adoption of new consolidation guidance affect reported non-operating income and earnings volatility.
- The sustainability of shareholder distributions alongside lower cash balances and continued share repurchases.