T. Rowe Price Group, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparative figures are for the three months ended March 31, 2022 unless otherwise stated. T. Rowe Price primarily earns investment advisory fees tied to assets under management (AUM), alongside administrative, distribution and servicing fees and carried-interest income.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net revenue | $1,537.6 million | $1,863.0 million | Down 17.5% |
| Operating expenses, GAAP | $1,053.4 million | $985.6 million | Up 6.9% |
| Net operating income | $484.2 million | $877.4 million | Down 44.8% |
| Operating margin, GAAP | 31.5% | 47.1% | Down 15.6 percentage points |
| Net income attributable to T. Rowe Price | $421.5 million | $567.9 million | Down 25.8% |
| Diluted EPS, GAAP | $1.83 | $2.41 | Down 24.1% |
| Diluted EPS, non-GAAP | $1.69 | $2.62 | Down 35.5% |
| Average AUM | $1,322.9 billion | $1,559.9 billion | Down 15.2% |
| Ending AUM | $1,341.7 billion | $1,551.8 billion | Down 13.5% |
Investment advisory fees fell 16.3% to $1,391.8 million, broadly tracking lower average AUM. Equity advisory fees declined 23.2%; alternatives fees rose 7.1%. The average annualized effective fee rate was 42.7 basis points, versus 43.2 basis points a year earlier. Capital allocation-based income decreased 61.9% to $16.9 million.
Net non-operating income was $135.4 million, compared with a $198.5 million loss in Q1 2022, reflecting investment gains and stronger market returns. GAAP results include consolidated sponsored investment products and market-related effects that management adjusts in its non-GAAP presentation; non-GAAP net income attributable to the company was $389.4 million.
AUM, cash flow, and balance sheet
- Quarter-end AUM rose $67.0 billion from year-end 2022: $83.1 billion from market appreciation and related effects was partly offset by $16.1 billion of net cash outflows. Equity had $23.5 billion of outflows; multi-asset had $7.1 billion of inflows.
- Net cash provided by operating activities, as reported, was $511.7 million, down from $1,103.4 million. Cash provided by operations attributable to T. Rowe Price was $672.7 million, versus $1,018.2 million. The filing notes that quarterly operating cash flow excludes the cash impact of variable compensation accrued during the year and substantially paid in December.
- Cash and cash equivalents on the balance sheet were $2,094.1 million at March 31, 2023, compared with $1,755.6 million at December 31, 2022. The company reported $4,491.9 million of cash and investments in T. Rowe Price products, including seed capital and investments hedging the supplemental savings plan liability; some product assets are not available for general operations.
- Total liabilities were $2,082.7 million. The filing does not report material general corporate borrowings; it reports $101.7 million of debt associated with investments in affiliated collateralized loan obligations, included in accounts payable and accrued expenses.
- Dividends paid were $282.2 million; the quarterly dividend was increased 1.7% to $1.22 per share. The company repurchased $2.7 million of shares under its authorization. It expects 2023 capital expenditures of about $370 million, approximately two-thirds for technology initiatives.
Material changes, outlook, and risks
- Revenue pressure reflected lower AUM and a mix shift toward lower-fee asset classes and vehicles. Management cited persistent growth in passive investing as a challenge to new client inflows, while continuing investments in personnel, technology, distribution and products.
- GAAP operating expenses increased, notably due to a $93.5 million year-over-year swing in supplemental savings plan-related compensation expense. On a non-GAAP basis, expenses declined 1.6%, to $1,022.5 million.
- The effective GAAP tax rate rose to 28.7% from 24.2%, partly due to valuation allowances against foreign deferred tax assets. Management estimated a full-year 2023 GAAP tax rate of 26%–30% and non-GAAP rate of 26.5%–29.5%.
- On April 20, 2023, the company completed its acquisition of Retiree, Inc.; management said the transaction terms were not material. It also had a $472.4 million commitment to fund OHA products over the next four years.
- The OHA contingent-consideration liability fell to $46.2 million from $95.8 million at year-end; a $49.6 million fair-value gain reduced Q1 operating expenses. Future earnout payments may be due beginning in 2025, subject to revenue targets.
- A California biometric-voiceprint class action was dismissed without prejudice in February 2023. Management assessed the likelihood of a material adverse outcome from ordinary-course claims as remote. The filing reports no material change in previously disclosed risk factors or market risks.
- Results remain sensitive to financial markets, AUM flows and composition, investment performance, fee levels, interest rates, inflation, competition, regulation, expenses and tax estimates. Management cautions that forward-looking statements are not guarantees of future performance.
Important facts for investors to verify
- Whether net outflows persist and how market movements affect AUM, fee revenue and the effective fee rate.
- Investment performance and its effect on client retention and new inflows; the filing shows uneven results across strategies and time periods.
- Whether expense levels, technology investment and operating margins develop as expected, including the impact of supplemental savings plan market movements.
- Assumptions behind the OHA contingent consideration and the $472.4 million product-funding commitment, as well as the company’s capital expenditure and tax-rate outlook.
- Cash available for corporate use versus assets held in consolidated sponsored investment products, and the risks and terms of the CLO-related debt.