Hennessy Advisors, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2020; comparative income and cash-flow results are for the three months ended December 31, 2019. Financial statement amounts below are in millions unless otherwise noted.
Business context
Hennessy Advisors provides investment advisory and shareholder services to 16 open-end mutual funds. It managed 10 funds internally and used sub-advisors for six. Most revenue is based on the funds’ average daily net assets (AUM).
Financial results and liquidity
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $7.789 | $10.244 | Down 24.0% |
| Operating expenses | $5.380 | $6.513 | Down 17.4% |
| Operating income | $2.409 | $3.731 | Down 35.4% |
| Operating margin | 30.9% | 36.4% | Down 5.5 percentage points |
| Net income | $1.773 | $2.628 | Down 32.5% |
| Net margin | 22.8% | 25.7% | Down 2.9 percentage points |
| Diluted EPS | $0.24 | $0.35 | Down |
| Operating cash flow | $1.051 | $1.285 | Down $0.234 |
- Investment advisory fees were $7.208 million, down 23.7%; shareholder service fees were $0.581 million, down 26.9%. Lower average fund assets drove the declines.
- At December 31, 2020, cash and cash equivalents were $9.954 million, current assets $13.402 million, current liabilities $3.572 million, and total stockholders’ equity $79.317 million. The filing reports no outstanding bank loan; the term loan was repaid in full in March 2020.
- Cash used in investing activities was $0.066 million and cash used in financing was $0.986 million, mainly reflecting $0.992 million of dividend payments. Cash decreased by just $0.001 million during the quarter.
- The company declared dividends of $0.14 per share for the quarter; it paid $0.1375 per share on December 2, 2020.
Material changes and operating trends
- Quarter-end AUM was $3.833 billion, 23.0% below December 31, 2019, primarily due to net outflows. Average AUM was $3.785 billion, down 23.5% year over year.
- During the quarter, organic inflows of $213.5 million and market appreciation of $455.6 million were outweighed by redemptions of $401.2 million. Redemptions averaged 3.5% of AUM per month, compared with 2.2% a year earlier. The Focus Fund had the largest reported net outflow ($182 million); the Japan Fund had the largest net inflow ($99 million).
- Operating expenses fell in dollars but rose to 69.1% of revenue from 63.6%, as lower revenue made fixed costs a larger share. Compensation expense declined mainly with incentive compensation; general and administrative expense declined mainly with lower conference and travel costs.
- Interest expense was zero versus $0.187 million a year earlier, following repayment of the loan. The effective tax rate was 26.4%, compared with 27.0%.
Outlook, risks, and other matters
- The filing provides no numerical earnings or revenue guidance. Management stated that cash and other liquid assets should meet capital requirements for at least one year from the report’s issuance. It noted that additional capital might be needed for longer-term requirements if existing liquidity and operating cash flow prove inadequate; there is no assurance of raising it.
- Management cited redemptions, fund performance, market fluctuations, economic conditions, interest rates, competition, and regulatory developments as factors affecting results. The company said the duration and business impact of COVID-19 remained uncertain, while describing its remote-work continuity measures and focus on fund performance and customer service.
- Management contracts, the principal asset, were $80.643 million and unchanged from September 30, 2020. A December qualitative review found no indication of impairment.
- The company reported no commitments or significant contingencies with original terms over one year other than operating leases. It began offering an updated dividend reinvestment and stock purchase plan in January 2021. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether AUM outflows and elevated redemption rates persist, especially in large funds such as Focus and Gas Utility.
- How AUM changes translate into advisory-fee revenue, margins, and cash generation given the company’s fixed-cost base.
- The sensitivity of results and liquidity to market declines, fund performance, and COVID-19-related developments.
- The sustainability of dividends and the terms and potential dilution associated with the updated stock purchase plan.
- The assumptions supporting the carrying value and indefinite useful life of management contracts.