Hennessy Advisors, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2016, compared with the three months ended December 31, 2015. The company provides investment advisory and shareholder services to the Hennessy Funds; its revenue is primarily tied to fund assets under management (AUM). Financial statements are unaudited.
Key financial results
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Total revenue | $13.294 million | $13.153 million | +1.1% |
| Operating income | $6.242 million | $6.261 million | -0.3% |
| Operating margin | 47.0% | 47.6% | -0.6 percentage points |
| Net income | $3.840 million | $3.650 million | +5.2% |
| Net margin | 28.9% | 27.8% | +1.1 percentage points |
| Diluted EPS | $0.74 | $0.71 | +4.2% |
| Operating cash flow | $2.251 million | $2.793 million | -19.4% |
Investment advisory fees rose 2.4% to $12.109 million as average daily AUM increased 1.8% to $6.54 billion. Shareholder service fees fell 10.9% to $1.185 million, reflecting a shift from Investor Class to Institutional Class assets. Operating expenses increased 2.3% to $7.052 million; compensation and sub-advisor fees rose, partly offset by lower general and administrative and distribution expenses. Interest expense declined 26.3% to $266,000, and the effective tax rate declined to 35.7% from 38.1%.
Financial position and liquidity
- At December 31, 2016, cash and cash equivalents were $4.105 million and current assets were $10.309 million, against current liabilities of $7.604 million.
- Total assets were $85.543 million; total liabilities were $44.361 million and stockholders’ equity was $41.182 million.
- Total bank debt was approximately $29.531 million, including $4.375 million current and $25.156 million long-term. The loan is secured by substantially all company assets, carries a reported effective rate of 3.61672%, and is due September 17, 2019. The company reported compliance with its loan covenants.
- Operating cash flow was $2.251 million; investing outflow was $83,000 and financing outflow was $1.598 million, including $1.094 million of principal payments and $506,000 of dividends. Cash increased $570,000 during the quarter.
- Management stated that cash and other liquid assets on hand were expected to meet short-term capital requirements. The company noted that additional capital might be needed for longer-term requirements if liquidity and operating cash flow were insufficient, with no assurance it could raise capital.
Material changes and operating context
- Quarter-end AUM was $6.593 billion, down 1.6% from September 30, 2016, as $321 million of net outflows exceeded $215 million of market appreciation. Redemptions averaged 3.3% of AUM per month, up from 2.9% a year earlier.
- Compared with December 31, 2015, AUM increased 4.2% to $6.6 billion, reflecting $618 million of market appreciation and the $435 million Westport Funds acquisition, offset by $784 million of net outflows.
- The largest quarterly net outflows were from the Hennessy Mid Cap 30 Fund ($210 million), Gas Utility Fund ($57 million), and Equity & Income Fund ($50 million). The Small Cap Financial Fund had the largest inflow ($41 million).
- Management contracts, the principal balance-sheet asset, were $74.410 million. The company reported no impairment at December 31, 2016.
Outlook, risks, and notable items
- Management emphasized fund performance, investor service, asset retention, inflows, and potential acquisitions as strategic priorities. It reported positive 1-year and 3-year performance for 15 of 16 funds, and positive annualized returns for all 16 over the 5-year, 10-year, and since-inception periods.
- No specific quantitative earnings or revenue guidance was provided. Management cited risks including fund redemptions, market and interest-rate movements, competition, regulation, and economic and international financial-market conditions; it expected regulatory developments to increase administrative and compliance costs.
- Subsequent fund actions: the Technology Fund proposed a shift to a quantitatively managed strategy effective March 1, 2017, with its advisory fee reduced from 0.90% to 0.74% and a one-year expense limitation. The Core Bond Fund was scheduled for liquidation on or about February 17, 2017. A proposed reorganization would combine the Large Value Fund into the Value Fund on or about February 28, 2017. The Technology and Core Bond funds each represented less than 0.10% of company AUM.
- The company paid a quarterly dividend of $0.10 per share. Disclosure controls were deemed effective, and management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether net fund outflows and elevated redemptions persist, and their effect on fee revenue and AUM.
- Fund-level flows and performance, particularly in the Mid Cap 30 and Gas Utility Funds, and the impact of announced fund changes and liquidation.
- Debt repayment, variable interest-rate exposure, covenant compliance, and liquidity relative to acquisition or other capital needs.
- Whether compensation, regulatory-compliance, and sub-advisor costs continue to rise faster than revenue.
- The impact of the Technology Fund’s proposed lower advisory fee and expense limitation on future revenue.