Hamilton Lane Incorporated — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2018. This is the company’s fiscal second quarter of fiscal 2019. Comparisons are with the corresponding 2017 periods. Dollar amounts below are in U.S. dollars.
Business context
Hamilton Lane provides private-markets investment management and advisory services, including customized accounts, specialized funds, advisory and reporting, and distribution management. At September 30, 2018, it reported $31.6 billion of fee-earning AUM and approximately $394 billion of AUA. The company operates as one segment.
Financial and operating performance
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Total revenue | $55.8 million, up 15% | $119.2 million, up 18% |
| Management and advisory fees | $53.2 million, up 15% | $104.2 million, up 6% |
| Incentive fees | $2.6 million, versus $2.4 million | $15.0 million, versus $3.4 million |
| Total expenses | $34.5 million, up 20% | $72.1 million, up 26% |
| Net income | $32.6 million, versus $18.2 million | $55.7 million, versus $43.8 million |
| Net income attributable to Hamilton Lane Incorporated | $11.2 million, versus $4.7 million | $20.1 million, versus $10.2 million |
| Diluted Class A EPS | $0.49, versus $0.26 | $0.88, versus $0.56 |
Management’s non-GAAP Fee Related Earnings were $22.4 million for the quarter and $43.2 million year to date, compared with $19.2 million and $43.0 million, respectively. Adjusted EBITDA was $25.9 million for the quarter and $56.3 million year to date, versus $22.6 million and $49.0 million. These are non-GAAP measures and should be considered alongside GAAP results.
Cash flow and liquidity: For the six months, operating cash flow was $73.1 million, investing cash flow was positive $8.6 million, and financing cash flow was negative $53.7 million. Cash, cash equivalents and restricted cash totaled $77.4 million at period end; unrestricted cash and cash equivalents were $75.2 million. The company reported $72.8 million of debt on the balance sheet (approximately $73.1 million principal); no revolving-facility borrowings were outstanding. The revolving facility provides up to $25 million, subject to conditions.
Balance sheet: Total assets were $356.2 million and total liabilities were $194.1 million at September 30, compared with $293.8 million and $157.7 million at March 31, 2018. The increase in assets included a $40.7 million deferred tax asset associated with the September offering.
Material changes and unusual items
- Quarterly revenue growth reflected higher specialized-fund, customized-account, and advisory/reporting fees. Year-to-date incentive fees rose substantially, including fees from a customized separate account and a co-investment fund.
- Other non-operating income included $11.1 million of gains on sales of two technology investments. The sales generated $22.5 million of cash proceeds. These gains materially boosted reported income and are not necessarily recurring.
- Expenses increased partly because of higher headcount and professional fees, increased incentive-fee compensation, and contingent compensation tied to the RAPM acquisition. RAPM-related contingent compensation was $5.1 million year to date.
- Fee-earning AUM increased $0.9 billion from March 31 to $31.6 billion. Customized-account AUM was $20.8 billion and specialized-fund AUM was $10.8 billion. Customized-account distributions, including accounts reaching the end of their terms, largely offset contributions year to date.
- The company adopted ASC 606 on April 1, 2018 using the modified retrospective method. It said adoption did not change the historical pattern of revenue recognition; it did change the presentation of certain reimbursed costs to gross revenue and expense.
- The September registered offering issued 2.7 million new Class A shares and raised approximately $129.6 million. All proceeds were used to fund exchanges of HLA membership interests; the company retained no proceeds from shares sold by existing stockholders.
Outlook, risks and contingencies
Management stated it expects to meet current and long-term liquidity needs using operating cash flow, cash on hand and potential external financing. The filing provides no specific earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- On November 5, 2018, the board authorized a 12-month repurchase program for up to 6% of outstanding Class A shares, capped at $50 million. Purchases may be suspended or terminated and may be funded with working capital or debt.
- The company declared a subsequent quarterly dividend of $0.2125 per Class A share, payable January 7, 2019.
- The tax receivable agreement payable increased to $65.0 million from $34.1 million, primarily due to tax benefits associated with the offering. Under the agreement, HLI generally pays former HLA unitholders 85% of specified realized tax savings.
- Unrecognized carried interest subject to contingencies was $332.7 million, net of non-controlling interests. If received, as much as $83.2 million could potentially be payable to employees and third parties under compensation arrangements; these amounts were not recorded as liabilities because payment was not yet probable.
- Key risks include market and investment-performance volatility, uncertain timing of incentive fees, client and investor defaults, employee retention, regulatory and tax changes, debt covenant compliance, and the ability to maintain fee structures and access suitable investments. A 100-basis-point increase in rates was estimated to add $0.7 million of interest expense over the next 12 months.
- Management reported no material pending or threatened legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of September 30, 2018.
Investor facts to verify
- How much of the period’s earnings growth was driven by the $11.1 million investment-sale gains and unusually high incentive fees, versus recurring management and advisory fees?
- Whether fee-earning AUM and client contributions continue to grow, particularly as account distributions and fund fee-base changes affect reported AUM.
- The cash-flow impact of member distributions, dividends, debt service, the new share-repurchase program, and possible future HLA unit exchanges.
- The realizability and timing of tax benefits, the associated valuation allowance, and future payments under the tax receivable agreement.
- Fund performance disclosures are historical, include unrealized valuations, and exclude Hamilton Lane’s own fees and expenses in the stated returns; they are not indicative of the company’s stock performance or future fund results.