Victory Capital Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; comparison periods ended June 30, 2020. Financial figures are in U.S. dollars; statement amounts are in millions unless noted. Victory Capital is a diversified asset manager whose revenue is primarily based on assets under management (AUM).
Business context and key metrics
- AUM was $161.9 billion at June 30, up 25.5% from $129.1 billion a year earlier and 4.9% from March 31, 2021. The year-over-year increase primarily reflected market appreciation; second-quarter growth also included positive net flows.
- Second-quarter AUM rose $7.6 billion: $7.7 billion of market appreciation and $176 million of net inflows were partly offset by $275 million from seed-capital liquidations and fund closures. First-half net flows were negative $998 million, while market appreciation added $15.4 billion; the period also included $547 million of acquired THB AUM.
- On June 30, Victory completed the acquisition of certain THB Asset Management assets and its investment team, adding $547 million of AUM at acquisition. THB manages responsible-investment strategies across micro-, small- and mid-cap, global and international equities.
Financial results and material changes
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $221.9 | $181.9 | $434.9 | $386.3 |
| Operating income | $95.3 | $65.8 | $185.0 | $156.4 |
| Net income | $69.3 | $44.7 | $134.5 | $101.9 |
| Diluted EPS | $0.93 | $0.61 | $1.81 | $1.38 |
| Adjusted EBITDA (non-GAAP) | $112.2 | $86.3 | $219.1 | $177.8 |
| Adjusted EBITDA margin (non-GAAP) | 50.6% | 47.5% | 50.4% | 46.0% |
- Second-quarter investment management fees grew 29.2% to $168.0 million, mainly reflecting higher average AUM ($158.5 billion versus $128.9 billion). Total revenue increased 22.0%. First-half revenue rose 12.6%.
- Fund administration and distribution fees rose 3.9% in Q2 to $53.9 million, but declined 2.6% for the first half to $106.5 million. The filing attributes weakness mainly to lower transfer-agent fees and a shift toward lower 12b-1-paying share classes.
- Second-quarter operating expenses increased to $126.6 million from $116.1 million. Personnel costs increased with higher incentive compensation and headcount; lower debt costs and reduced restructuring costs partly helped results. Revenue on average AUM was 56.2 basis points for Q2 versus 56.7 basis points a year earlier.
- For the six months, operating cash flow was $164.2 million, versus $120.9 million. Investing activities used $7.3 million and financing activities used $148.0 million. Cash increased to $31.6 million from $22.7 million at year-end 2020.
- Long-term debt, net of issuance costs and discount, was $667.5 million at June 30, versus $769.0 million at December 31, 2020; term-loan principal was $681.2 million. Victory repaid $107.0 million of debt in the first half. It had no revolving-credit borrowings and reported covenant compliance.
Liquidity, outlook, risks and unusual items
- Liquidity included $31.6 million cash and an undrawn revolving facility of approximately $100 million, subject to a $0.1 million standby letter of credit. Accounts and other receivables were $98.7 million; accounts and other payables were $90.0 million.
- The company gave no specific full-year financial guidance in the provided filing text. Management said operating results for the interim periods are not necessarily indicative of full-year results and identified market performance, client flows and AUM composition as important drivers.
- After quarter-end, Victory repaid another $35 million of term loans. Its board declared a $0.15-per-share quarterly dividend on August 5, payable September 27, 2021. The company had declared $0.12 per share for Q2 and had $11.7 million remaining under its then-current $15 million share-repurchase authorization at June 30.
- The estimated USAA acquisition earn-out liability was $100.7 million at June 30, up $8.2 million in the first half; the increase reduced reported operating income. Up to $112.5 million of contingent consideration remained payable, subject to revenue thresholds and other contract terms.
- Management said COVID-19 had not materially adversely affected reported first-half results, but its future effects remained uncertain. Principal risks include AUM losses from market declines or client withdrawals, investment performance, fee-rate and asset-mix changes, competition, key-person retention, cyber and third-party operating risks, regulation, litigation, acquisitions, and substantial indebtedness. A 10% AUM change, assuming proportional distribution across strategies, was estimated to change annualized revenue by approximately $90.7 million at the Q2 weighted-average fee rate.
- The company hedged $450 million of term-loan exposure with a swap through July 2026; remaining debt was exposed to variable interest rates. No material legal proceedings were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether positive market-driven AUM growth translates into durable net inflows; first-half net flows remained negative despite Q2 inflows.
- How AUM mix, strategy performance and lower-fee share classes affect the average fee rate and revenue growth.
- The assumptions, revenue outcomes and timing underlying the USAA earn-out liability and remaining potential payments.
- Debt reduction, variable-rate exposure, cash generation and the capacity to fund dividends, repurchases and Alderwood commitments.
- Non-GAAP adjustments and reconciliations when comparing Adjusted EBITDA or Adjusted Net Income with GAAP results and other companies.