Hennessy Advisors, Inc. — Fiscal 2022 Third Quarter
Reporting period: Three and nine months ended June 30, 2022; unaudited. The company earns primarily investment advisory fees from 16 open-end mutual funds, with shareholder service fees as a smaller revenue source. The filing was signed August 3, 2022.
Financial performance
| Metric | Quarter ended June 30, 2022 | Quarter comparison | Nine months ended June 30, 2022 | Nine-month comparison |
|---|---|---|---|---|
| Revenue | $6.91 million | Down 19.0% | $23.19 million | Down 4.4% |
| Net operating income | $2.33 million; 33.7% margin | $3.04 million; 35.6% margin | $7.79 million; 33.6% margin | $8.01 million; 33.0% margin |
| Interest expense | $0.56 million | None in prior-year quarter | $1.56 million | None in prior-year period |
| Net income | $1.30 million; 18.8% margin; diluted EPS $0.17 | $2.24 million; 26.3% margin; diluted EPS $0.30 | $4.82 million; 20.8% margin; diluted EPS $0.63 | $5.90 million; 24.3% margin; diluted EPS $0.80 |
| Operating cash flow | Not reported for the quarter | $6.25 million | Down from $7.21 million |
- Quarterly advisory fees fell 19.3% to $6.38 million and shareholder service fees fell 14.4% to $0.53 million. Nine-month declines were 4.3% and 5.7%, respectively. The main driver was lower average fund assets.
- Quarterly operating expenses declined 16.6% to $4.58 million, but represented a larger share of revenue: 66.3% versus 64.4%. For nine months, expenses fell 5.2% to $15.40 million and the expense ratio improved to 66.4% from 67.0%.
- Nine-month cash from investing was a $0.16 million outflow, largely property and equipment purchases. Financing provided $35.55 million, primarily from the notes offering, net of dividends and related costs. Cash increased $41.64 million to $57.48 million.
Financial position and material changes
- At June 30, 2022, total assets were $142.37 million, including $57.48 million of cash and cash equivalents and $80.64 million of management contracts. Total liabilities were $56.39 million; stockholders’ equity was $85.98 million. Current assets were $60.48 million and current liabilities $3.53 million.
- The company had $38.80 million of notes payable, net of issuance costs. The notes have $40.25 million principal, bear 4.875% interest, and mature December 31, 2026. The offering was completed in October 2021; the notes are unsecured and may be redeemed at the company’s option beginning December 31, 2023.
- Assets under management (AUM) were $3.16 billion at quarter-end, down $0.96 billion, or 23.4%, year over year. During the quarter, $183.7 million of organic inflows were outweighed by $351.6 million of redemptions and $480.6 million of market depreciation.
- Effective January 31, 2022, the company ended the sub-advisory arrangement for the Energy Transition and Midstream funds and began managing them internally. Lower sub-advisory fees contributed to expense reductions.
- The company declared cash dividends of $0.14 per share for the quarter; nine-month dividends declared were $0.41 per share. Management contracts remained at $80.64 million, and management reported no impairment indication following its qualitative review.
Outlook, commentary, and risks
- Management said cash and other liquid assets on hand were expected to meet capital requirements for at least one year from the report’s issuance, as well as longer-term needs. If resources prove insufficient, it may seek additional borrowing capacity or access capital markets; there is no assurance it can raise additional capital.
- No specific financial guidance was provided. Management emphasized investment performance, investor service, retaining existing fund assets, generating inflows, and pursuing future acquisitions.
- Management described a difficult market environment, including inflation, interest-rate increases, weaker equity markets, and uncertainty around economic growth and geopolitical conflict. The Dow’s total return was negative 10.78% for the quarter and negative 7.71% for the nine-month period. Redemptions averaged 3.2% of AUM per month in the quarter, versus 2.8% a year earlier.
- Revenue and liquidity depend on average AUM and are exposed to market performance, purchases and redemptions, competition, regulation, interest rates, inflation, and broader economic conditions. The filing added a risk factor for catastrophic events, including infectious-disease outbreaks, military conflicts, and financial-market disruptions. No material change to other previously disclosed risk factors was reported.
- The nine-month effective tax rate was 23.0%, versus 26.3% a year earlier; a $0.2 million California tax refund benefit contributed to the lower rate. The filing reported no significant contingencies beyond operating leases and no material subsequent events.
Important facts for investors to verify
- Whether AUM declines and fund redemptions continue, particularly the reported outflows from the Japan and Focus funds, and how that affects fee revenue.
- Whether internal management of the Energy Transition and Midstream funds sustains the savings in sub-advisory fees and supports fund performance.
- The cash and debt position after note interest and dividend payments; much of the cash increase during the period came from the notes offering.
- The assumptions and valuation supporting the $80.64 million management-contract asset, including future impairment assessments.
- Whether management’s liquidity assessment remains valid if markets, investor flows, or operating results weaken.