Virtus Investment Partners, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Virtus provides investment management and related services to retail and institutional clients. Its revenue is primarily based on fees tied to assets under management (AUM).
Financial results
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $144.6 million | $130.7 million; up 10.6% |
| Operating income | $24.6 million | $21.0 million; up 17.2% |
| Operating margin | 17.0% | 16.1% |
| Net income (loss) attributable to common stockholders | $(4.3) million | $19.7 million |
| Diluted EPS | $(0.58) | $2.61 |
| Net cash used in operating activities | $(252.3) million | $(23.2) million |
| Cash and cash equivalents | $158.5 million | $221.8 million at Dec. 31, 2019 |
| Debt on balance sheet | $251.5 million | $277.8 million at Dec. 31, 2019 |
Revenue growth reflected higher average AUM and a 1.1-basis-point increase in the average total fee rate. Operating expenses rose 9.3% to $120.0 million, including $6.7 million of consolidated investment product (CIP) costs, largely related to a new CLO launch. The reported effective tax rate was 91.1%, primarily because unrealized investment losses had associated valuation allowances. Investment and CIP losses drove total other expense of $15.6 million, versus other income of $2.0 million in Q1 2019.
AUM and flows
- Total AUM was $90.7 billion at March 31, down $18.2 billion, or 16.7%, from year-end 2019 and down 10.8% year over year. Management attributed the quarterly decline primarily to market performance.
- Long-term AUM was $89.5 billion. Total long-term net outflows were $1.3 billion, compared with $54 million in Q1 2019; market performance reduced long-term AUM by $16.6 billion.
- Total sales were $7.0 billion, up 27.5% from $5.5 billion a year earlier. Average long-term AUM increased 10.6% year over year to $104.7 billion, supporting fee revenue despite quarter-end market declines.
Cash flow, debt, and capital
- Operating cash use increased substantially, primarily because CIP made $509.3 million of investment purchases, partly offset by $274.0 million of sales. Virtus said annual incentive compensation payments were $84.7 million in Q1 2020, versus $76.2 million in Q1 2019.
- Financing activities provided $314.6 million, driven largely by net CIP borrowing. CIP cash flows and liabilities relate to consolidated investment products and should not be read as equivalent to corporate cash or debt.
- Virtus reported $258.2 million outstanding on its term loan, maturing in June 2024, and no borrowings on its $100 million revolving facility, expiring in June 2022. The balance-sheet debt figure is presented net of debt issuance costs. Virtus repaid $27.5 million of term debt in the quarter, including retiring $10.0 million of principal for $8.9 million.
- The company repurchased 110,956 shares for $10.0 million and declared a $0.67-per-share common dividend payable May 15, 2020. Its mandatory convertible preferred stock converted into common stock in February.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance was provided. Management expected the AUM decline to weigh on near-term revenue and said the timing and magnitude of any market recovery remained uncertain.
- COVID-19 and the associated market disruption were the central risks. The S&P 500 and MSCI World indices fell 20% and 21%, respectively, during the quarter. Further market weakness could reduce AUM, fee revenue, earnings, and the value of seed investments.
- Virtus said its liquidity and capital resources were not materially affected by COVID-19 during Q1 and that it believed resources were sufficient to continue operations for the foreseeable future. It also cautioned that prolonged market deterioration could limit access to financing.
- Nearly all employees were working remotely. The company identified potential extended-remote-work risks, including technology strain, cybersecurity threats, and disruptions affecting employees or service providers.
- Consolidated CLOs had $2.1 billion of investments and $2.1 billion of notes payable on the balance sheet; their obligations have recourse only to CLO assets. The company’s exposure is limited to its beneficial interests and accrued management fees. Its CLO subordinated-note interest declined about $20 million during March, primarily because of COVID-related declines in bank-loan fair values; certain CLO results are reported on a one-month lag.
- Legal and regulatory matters were described as not likely, individually or collectively, to have a material adverse effect based on information then available, though outcomes remain uncertain. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- How subsequent market performance, investor flows, and AUM levels affect fee revenue and earnings after the quarter-end decline.
- Whether the reported 91.1% effective tax rate and valuation allowance effects recur or materially change in later periods.
- The composition and economic effect of CIP cash flows, CLO borrowing, and the one-month reporting lag, separately from Virtus’s corporate liquidity and debt.
- Whether COVID-19 causes further investment losses, operational disruption, financing constraints, or changes to the common dividend and share-repurchase program.
- Future outcomes of legal and regulatory matters and any change in management’s assessment of potential exposure.