Victory Capital Holdings, Inc. — Q1 2023 Form 10-Q
Business context and period: Victory Capital is a diversified asset manager; results cover the three months ended March 31, 2023, compared with Q1 2022. All figures below are in U.S. dollars. The interim financial statements are unaudited.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $201.3 million | $230.0 million; down 12.5% |
| Investment management fees | $156.8 million | $179.5 million; down 12.6% |
| Fund administration and distribution fees | $44.5 million | $50.6 million; down 12.0% |
| Operating income | $74.6 million | $101.5 million; down 26.6% |
| Net income | $49.3 million | $71.3 million; down 30.9% |
| Diluted EPS | $0.71 | $0.97; down 26.8% |
| Adjusted EBITDA (non-GAAP) | $99.2 million; 49.3% margin | $114.4 million; 49.7% margin |
| Adjusted Net Income (non-GAAP) | $65.6 million | $81.1 million |
| Operating cash flow | $64.2 million | $74.8 million |
Average AUM was $157.8 billion, down from $176.9 billion a year earlier. Quarter-end AUM was $158.6 billion, down from $178.1 billion year over year but up 3.7% from December 31, 2022. Q1 market appreciation of $6.9 billion was partly offset by $1.2 billion in net outflows; gross flows were $6.1 billion. Revenue on average AUM was 51.7 basis points versus 52.7 basis points.
Cash and cash equivalents were $38.3 million at quarter-end. Long-term debt was $1.002 billion principal, or $986.4 million net of issuance costs and discounts. The company had approximately $100 million available under its revolving credit facility and no revolver borrowings. Total liabilities were $1.480 billion and stockholders’ equity was $1.049 billion.
Material changes and notable items
- Lower average AUM was the primary driver of declining management fees. Compensation and asset-based distribution expenses also fell, helping keep adjusted EBITDA margin broadly stable.
- Interest expense and other financing costs rose to $14.2 million from $9.2 million, mainly due to higher average interest rates. Cash interest paid increased to $15.3 million from $7.1 million.
- A $7.4 million increase in the estimated value of acquisition earn-out liabilities was recorded as expense, versus a $3.5 million decrease recorded as a benefit in Q1 2022. The liabilities totaled $237.8 million at March 31, 2023: $32.0 million for USAA AMCO and $205.8 million for WestEnd.
- Cash used in financing was $62.5 million, primarily reflecting $34.4 million of share repurchases, $22.1 million of dividends paid, and $7.7 million of taxes on net share settlements. The company repurchased about 1.0 million shares at an average $31.88 per share.
- The board authorized a new $100 million repurchase program, with $96 million remaining at quarter-end. Q1 dividends declared were $0.32 per share, compared with $0.25 a year earlier.
Outlook, commentary and risks
The filing gives no specific revenue, earnings or AUM guidance. Management says profitability depends substantially on AUM levels, asset mix and effective fee rates. It reported that 66% of fund and ETF AUM had overall four- or five-star Morningstar ratings; 54%, 73%, 78% and 79% of strategy AUM exceeded respective benchmarks over one-, three-, five- and ten-year periods.
Management highlighted market depreciation, client withdrawals, investment performance, fee-rate mix, competition, and the ability to retain key personnel and integrate acquisitions among business risks. A 10% change in AUM, proportionately across strategies, would change annualized revenue by an estimated $82.7 million at the quarter’s weighted-average fee rate. The company also has exposure to unhedged floating-rate debt; a $450 million portion was effectively fixed through July 2026 under an interest-rate swap.
The company stated it was in compliance with its financial covenant at March 31, 2023; the leverage covenant applies when revolver borrowings exceed specified levels. It reported no material legal proceedings and no material changes to the risk factors in its 2022 Form 10-K. Management concluded disclosure controls were effective, with no material change in internal control over financial reporting during the quarter.
After quarter-end, the board approved a $0.32-per-share quarterly cash dividend payable June 26, 2023. On April 24, 2023, Victory introduced its Victory Capital InVest brand and announced Marketplace, an expanded direct-investor brokerage platform.
Important facts for investors to verify
- Whether AUM outflows persist and how market returns and asset mix affect fee revenue and the effective fee rate.
- The assumptions and eventual cash payments for the $237.8 million of acquisition contingent consideration, including the WestEnd earn-out.
- Debt interest-rate exposure, future interest expense, covenant headroom and the availability of the revolving facility.
- Capital allocation: repurchases, dividends, and the effect of these uses of cash on liquidity and debt reduction.
- The company’s non-GAAP reconciliations and adjustments, especially the treatment of acquisition-related items and earn-out fair-value changes.