Victory Capital Holdings, Inc. — 2017 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2017, with comparisons to 2016 and 2015. Victory is an independent, multi-boutique investment manager; substantially all revenue is tied to assets under management (AUM). At year-end, it managed $61.8 billion across 65 strategies. The 2017 results include a full year of RS Investments, acquired in July 2016, compared with five months in 2016.
Key financial and operating metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $409.6 million | $297.9 million |
| Operating income | $90.2 million | $24.5 million |
| GAAP operating margin | 22.0% | 8.2% |
| Net income (loss) | $25.8 million | $(6.1) million |
| Diluted EPS | $0.43 | $(0.12) |
| Adjusted EBITDA (non-GAAP) | $149.1 million | $98.1 million |
| Adjusted EBITDA margin (non-GAAP) | 36.4% | 32.9% |
| Adjusted Net Income (non-GAAP) | $62.0 million | $39.0 million |
| Operating cash flow | $96.2 million | $39.5 million |
Revenue grew 38%, led by investment management fees, up 38% to $343.8 million; fund administration and distribution fees rose 33% to $65.8 million. The 2017 GAAP tax expense was $12.6 million, including a $2.4 million one-time benefit from remeasuring deferred taxes after the Tax Act. Management estimated a lower combined tax rate of about 24% from 2018, versus about 38% previously, while noting reduced tax benefits from acquired goodwill and intangibles.
Year-end AUM increased 12% to $61.8 billion from $55.0 billion, driven by $8.4 billion of market appreciation, partly offset by $1.5 billion of net outflows and a $0.1 billion reduction primarily related to fund liquidations. Excluding Diversified, which Victory was exiting, net outflows were $0.9 billion; the comparable 2016 figure was $2.3 billion of net inflows. In 2017, mid-cap equity and Solutions had net inflows of $1.3 billion and $1.1 billion, respectively. Average revenue on AUM was 71 basis points, unchanged from 2016.
Fourth-quarter 2017 revenue was $105.6 million, operating income $26.9 million, net income $11.2 million and diluted EPS $0.19. The filing reports no standalone fourth-quarter cash flow figure.
Cash and cash equivalents were $12.9 million at year-end, down from $16.4 million. The company had $25.0 million undrawn under its revolving facility and $51.3 million in accounts and other payables. Operating cash flow was $96.2 million; investing activities used $8.5 million and financing activities used $91.3 million. Year-end debt was $499.7 million gross principal, or $483.2 million net of unamortized discounts and issuance costs. Total assets were $792.6 million and total equity $231.2 million.
Material changes versus the prior comparable period
- Net income turned positive from a 2016 loss, and operating margin and Adjusted EBITDA margin expanded. Higher AUM, a full year of RS Investments, completed integration work and lower acquisition-related and restructuring costs contributed; interest expense nevertheless rose 41% to $48.8 million.
- AUM growth was market-led, not flow-led: total net flows shifted from $875 million of inflows in 2016 to $1.5 billion of outflows in 2017. Excluding Diversified, flows moved from $2.3 billion of inflows to $0.9 billion of outflows.
- Victory reported $52 million of annualized net expense synergies from RS Investments and approximately $76 million of net annualized synergies from its three acquisitions. It recorded $6.2 million of restructuring and integration costs in 2017.
- On February 12, 2018, after year-end, Victory completed its IPO at $13 per share and refinanced the 2014 debt. IPO proceeds were $156.5 million net. A new $360 million term loan and $50 million revolving facility replaced the prior facility; subsequent repayments reduced term-loan principal to $323 million by March 2018. The new term-loan rate was reported as 4.40% at February 12, 2018, subject to adjustment.
Outlook, commentary, risks and unusual items
- Outlook: No formal revenue or earnings guidance is provided. Management describes organic growth, further acquisitions and operating leverage as growth drivers, and expects scalable operations to support margin expansion. It also cautions that continued Solutions Platform growth may lower the average fee rate.
- Flows and investment performance: Management cited strong gross flows but negative net flows, including the Diversified exit and client reallocations following strong performance. AUM and fee revenue remain exposed to markets, investment results, redemptions and strategy capacity limits. Two Sycamore funds totaling $16.0 billion were generally closed to new investors.
- Debt and capital allocation: The company paid $135.2 million in 2017 dividends, largely funded by additional borrowing, and does not currently intend to pay regular cash dividends. Debt covenants, interest costs and required repayments could constrain flexibility.
- Unusual items: A $4.4 million impairment was recorded on a receivable acquired with RS Investments, reducing its year-end carrying value to $8.4 million. The filing also reports $2.1 million of 2017 debt-modification costs in general and administrative expense, alongside acquisition and integration expenses.
- Principal risks: Dependence on AUM-based fees; client and intermediary concentration; investment underperformance and key-person departures; competition and fee pressure from passive products; reliance on third-party providers and technology; cybersecurity, regulatory and litigation exposure; goodwill and intangible impairment; and substantial leverage. The 10 largest intermediary relationships represented approximately 34% of AUM.
- Governance and reporting: Class B shares carry ten votes per share, and Crestview GP held 62.6% of voting power as of March 13, 2018. The company is a controlled company and an emerging growth company. Management concluded disclosure controls were effective, but the 10-K does not include management’s assessment or auditor attestation of internal control over financial reporting under the newly public company transition period.
Most important facts for investors to verify
- Whether organic net flows improved after 2017, particularly outside the discontinued Diversified business, and whether market appreciation—not client inflows—continues to drive AUM growth.
- Whether the reported RS and total acquisition synergies were fully realized and sustained, and how recurring operating costs compare with adjusted earnings.
- Post-IPO debt principal, interest expense, covenant headroom and cash available after repayments; compare these with operating cash flow and contractual obligations.
- The assumptions and recoverability behind the impaired $8.4 million receivable, and the carrying value of $692.1 million of goodwill and intangible assets.
- How the Tax Act affects actual tax expense and acquired-intangible tax benefits, versus management’s estimated 2018 tax rate.
- Potential dilution, share sales and governance implications of the dual-class structure, employee equity awards, and Crestview’s voting control.
The independent auditor issued an unqualified opinion on the consolidated financial statements. Adjusted EBITDA and Adjusted Net Income are non-GAAP measures and should be assessed alongside GAAP results.