Virtus Investment Partners, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Virtus is an investment manager whose revenue is primarily asset-based fees. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $213.5 | $225.3 | $411.4 | $477.7 |
| Operating income | $39.0 | $56.7 | $67.6 | $122.2 |
| Operating margin | 18.3% | 25.1% | 16.4% | 25.6% |
| Net income attributable to Virtus | $30.3 | $17.4 | $68.9 | $50.5 |
| Diluted earnings per share | $4.10 | $2.29 | $9.31 | $6.54 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $102.1 | $37.6 |
Q2 revenue fell 5.2%, while operating income declined 31.1%. Investment management fees were down 2.7%, and distribution and administration fees also decreased. Employment expense rose 17.2% in Q2, partly due to AlphaSimplex-related retention payments. Net income attributable to Virtus increased despite lower operating income, helped by less adverse investment/CIP results versus the prior year and lower income tax expense. Q2 diluted EPS increased 79.0%.
Assets, flows, liquidity and debt
- Assets under management were $168.3 billion at June 30, up 8.3% year over year. The increase reflected $16.3 billion of positive market performance and $7.8 billion from AlphaSimplex, partly offset by $8.6 billion of net outflows.
- Q2 total net flows were approximately breakeven (net outflows of $28 million), versus $4.8 billion of outflows a year earlier. Open-end funds had $2.1 billion of Q2 outflows; institutional accounts had $2.2 billion of inflows. Six-month net outflows were $1.9 billion.
- Corporate cash and cash equivalents were $201.5 million at June 30, down from $338.2 million at year-end 2022; investments were $123.3 million. The separate $155.5 million of CIP cash is associated with consolidated investment products, not simply corporate available cash.
- Debt on the balance sheet was $294.2 million, net of $6.0 million of issuance costs, versus $255.0 million at year-end. The company reported $260.2 million outstanding on the term loan and $40.0 million on its revolving facility at June 30. It repaid $20.0 million on the revolver on August 4, after quarter-end. The credit agreement was amended to replace LIBOR with SOFR.
- Six-month operating cash flow was $102.1 million; investing cash outflow was $123.2 million, including the AlphaSimplex acquisition; financing cash outflow was $210.7 million. Operating cash flow benefited substantially from increased net sales of investments by CIP, so it should not be read as solely reflecting underlying corporate cash generation.
- The company paid $26.4 million in common dividends and repurchased $10.0 million of shares in the first half. The quarterly dividend declared was $1.65 per share.
Material changes and notable items
- Virtus acquired AlphaSimplex on April 1 for $113.4 million in cash. The preliminary allocation included $48.3 million of goodwill and $55.4 million of intangible assets. AlphaSimplex revenue and operating income were not material in the reported period; the acquisition added $7.8 billion to reported AUM.
- Average AUM for the first half fell 12.8% year over year, contributing to the 13.9% decline in revenue. Average fee rates rose modestly, which management attributed primarily to higher-fee alternative strategies added through AlphaSimplex.
- Contingent consideration was remeasured, producing a $6.8 million gain in 2023 versus a $2.9 million expense in 2022. Management cited changes in performance estimates and discount rates.
- The six-month effective tax rate was 23.2%, versus 38.4% in 2022, primarily reflecting stock-compensation tax benefits and changes in valuation allowances.
- Consolidated investment products include CLOs with substantial assets and liabilities. Their notes are obligations of the CLOs, generally with recourse limited to their assets; Virtus says its exposure is limited to its beneficial interests and accrued management fees. CLO loan fair value was $154.4 million below unpaid principal at June 30; no material collateral assets were in default.
Outlook, risks and contingencies
The filing provides no specific revenue, earnings, AUM, or cash-flow guidance. Management cautions that interim results are not necessarily indicative of full-year results. Results remain sensitive to markets, AUM levels and flows, investment performance, client withdrawals, fee pressure, distribution relationships, personnel retention, technology and cybersecurity, regulation, litigation, and the ability to meet debt covenants and payments. The company reported no material changes to its previously disclosed risk factors or market-risk disclosures.
Virtus is involved in litigation, arbitration, and regulatory inquiries in the ordinary course. Management believes current matters are not likely to have a material adverse effect on consolidated results, cash flows, or financial condition, but notes that outcomes are inherently uncertain and an adverse matter could affect a particular period. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether AUM flows improve, especially continued open-end fund outflows, and how market performance affects fee revenue.
- Whether AlphaSimplex delivers expected strategic and financial benefits, and how acquisition-related compensation, amortization, and debt affect margins.
- The source and sustainability of operating cash flow, given the material contribution from CIP investment sales.
- Debt balances, interest costs, covenant headroom, and the effect of the post-quarter $20.0 million revolver repayment.
- Potential CLO collateral valuation, interest-rate, and liquidity risks, distinguishing CIP obligations from Virtus’s direct obligations.
- Developments in contingent consideration valuations, legal or regulatory matters, and the preliminary AlphaSimplex purchase-price allocation.