Virtus Investment Partners, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Virtus provides investment management and related services to institutional and individual investors. The filing is unaudited; results for the quarter are not necessarily indicative of full-year results.
Financial and operating performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total revenue | $222.0 million | $197.9 million | +12.2% |
| Operating income | $32.3 million | $28.6 million | +13.0% |
| Operating margin | 14.5% | 14.4% | Up approximately 0.1 percentage point |
| Net income | $37.9 million | $34.6 million | +9.3% |
| Net income attributable to Virtus | $29.9 million | $38.6 million | -22.7% |
| Diluted earnings per share | $4.10 | $5.21 | -21.3% |
| Cash used in operating activities | $34.5 million | $43.0 million | Outflow narrowed by $8.4 million |
Investment management fees rose 14.5% to $188.4 million, primarily reflecting higher average assets under management (AUM). Total operating expenses increased 12.1% to $189.7 million, led by higher employment expenses, including AlphaSimplex-related costs and increased profit- and sales-based compensation. The effective tax rate was 18.9%, versus 20.1% a year earlier.
- AUM: $179.3 billion at quarter-end, up 15.8% year over year and 4.1% from December 31, 2023. Year-over-year growth included $25.7 billion of positive market performance and $7.8 billion from the April 2023 AlphaSimplex acquisition, partly offset by $6.6 billion in net outflows.
- Flows and sales: Q1 total sales were $7.6 billion, up 21.6%. Net flows were negative $1.2 billion, compared with negative $1.9 billion in Q1 2023. Institutional accounts had $1.3 billion of net outflows; open-end funds had $0.6 billion of net outflows, partly offset by $0.7 billion of retail separate-account inflows.
- Cash and liquidity: Company cash and cash equivalents were $123.9 million at March 31, down from $239.6 million at year-end. Investments were $127.4 million. Cash used in operating activities included the seasonal first-quarter payment of $146.1 million in prior-year incentive compensation.
- Debt: Balance-sheet debt was $253.0 million, net of debt issuance costs; the term loan had $258.1 million outstanding before those costs. The company repaid $0.7 million during the quarter. The credit agreement includes a $175 million revolving facility expiring in September 2026 and a term loan maturing in September 2028.
- Capital returns: Virtus declared a $1.90-per-share quarterly dividend and paid $14.9 million in dividends during the quarter. It repurchased 21,108 shares for $5.0 million; 583,437 shares remained available under the repurchase program.
Material changes and notable items
- Revenue and operating income grew with higher average AUM, while the average management fee rate was nearly flat at 41.9 basis points versus 42.0 basis points. Management cited a shift toward lower-fee assets, partly offset by higher-fee AlphaSimplex alternative strategies.
- Although total net income increased, net income attributable to Virtus and diluted EPS declined. The reported attribution to noncontrolling interests changed substantially year over year; investors should review the related noncontrolling-interest disclosures when assessing the earnings comparison.
- AlphaSimplex, acquired April 1, 2023, contributed to higher compensation, depreciation and amortization expenses. Q1 2024 also included $0.8 million of restructuring expense; there was none in Q1 2023.
- Contingent consideration was $66.7 million on the balance sheet, down from $90.9 million at year-end, including $41.7 million measured using Level 3 inputs. The quarter included $24.2 million of contingent-consideration payments.
- Consolidated investment products (CIP), principally CLOs, add large investment and borrowing balances to reported statements. Their CLO notes are obligations of the relevant products, with contractual recourse to those products’ assets; Virtus says its exposure is limited to its beneficial interests and accrued fees.
Outlook, risks and controls
The filing provides no specific earnings, revenue or AUM guidance. Management identifies AUM declines, net outflows, market movements, competition, distribution relationships, key-person retention, technology and cybersecurity, investment losses, debt covenant compliance, legal and regulatory matters, and goodwill or intangible-asset impairment among relevant risks. Interest rates and securities prices are the principal market risks; the filing reports no material change in market-risk disclosures or risk factors from the 2023 Form 10-K. Management stated that disclosure controls were effective at a reasonable assurance level and reported no material change in internal control over financial reporting.
Virtus said legal and regulatory proceedings are not expected, based on currently available information, to have a material adverse effect; however, it cautioned that outcomes are inherently unpredictable and an adverse result could materially affect particular periods. No specific material contingency loss amount is provided in the filing text.
Key facts for investors to verify
- Whether net outflows persist, especially in open-end funds and institutional accounts, and how they affect AUM and fee revenue.
- Drivers of the decline in earnings attributable to Virtus and EPS despite higher total net income; reconcile the noncontrolling-interest presentation.
- Cash generation after first-quarter incentive-compensation payments, and the company’s liquidity and debt-covenant position.
- AlphaSimplex’s contribution to growth, expenses and integration, alongside the Level 3 contingent-consideration assumptions and remaining payments.
- Exposure to market and interest-rate changes, including the distinction between Virtus’s own debt and CIP obligations.