Hennessy Advisors, Inc. — Q2 FY2021 10-Q
Reporting period: Fiscal quarter and six months ended March 31, 2021; comparative periods ended March 31, 2020. Amounts are in U.S. dollars unless noted. Hennessy advises 16 open-end mutual funds and provides shareholder services; revenue is primarily based on funds’ average daily net assets.
Key financial results
| Metric | Three months ended Mar. 31, 2021 | Six months ended Mar. 31, 2021 |
|---|---|---|
| Revenue | $7.934 million | $15.723 million |
| Net operating income | $2.563 million; 32.3% of revenue | $4.972 million; 31.6% of revenue |
| Net income | $1.886 million | $3.659 million |
| Diluted EPS | $0.26 | $0.50 |
| Operating cash flow | Not presented for quarter | $3.623 million |
For the six-month period, operating expenses were $10.751 million and net income margin was 23.3%. The company declared dividends of $0.14 per share for the quarter and $0.28 per share for the six months.
At March 31, cash and cash equivalents were $11.476 million, current assets $15.078 million, total assets $97.413 million, and stockholders’ equity $80.571 million. The company reported no outstanding bank loan; it had repaid its term loan in full in March 2020. Operating lease liabilities totaled $1.210 million, including $0.384 million current.
Changes versus prior comparable periods
- Quarterly revenue fell 10.6% year over year; six-month revenue fell 17.8%. Lower average fund assets drove lower advisory fees, while lower Investor Class assets reduced shareholder service fees.
- Quarterly net income decreased 4.3% to $1.886 million; six-month net income decreased 20.4% to $3.659 million. Six-month diluted EPS declined from $0.62 to $0.50.
- Operating expenses declined in dollars, but rose as a share of revenue: to 67.7% for the quarter and 68.4% for six months, as revenue declined faster than costs. Net operating margin fell from 35.2% to 31.6% for the six-month comparison.
- Average assets under management were $3.9 billion for the six months, down 17.4% year over year; period-end AUM was $4.023 billion, up 21.2% from March 2020, primarily due to market appreciation. In the March quarter, $208.3 million of organic inflows and $352.4 million of market appreciation were offset partly by $369.8 million of redemptions.
- Six-month operating cash flow was $3.623 million versus $5.289 million a year earlier. Cash increased $1.521 million, compared with a $17.690 million decrease in the prior-year period, which included loan repayment and share buybacks.
Outlook, risks, and notable items
Management gave no quantified earnings or revenue guidance. It said cash and other liquid assets should cover capital requirements for at least one year from issuance of the report. The business remains exposed to market performance, fund redemptions, competition, interest rates, regulation, and the uncertain effects of COVID-19; management said the pandemic’s continuing effect could not be reasonably estimated. The company emphasized fund performance, investor service, retaining assets, organic growth, and potential future acquisitions. Management also expects regulatory developments to add administrative and compliance costs.
The quarter included renewal of the Novato office lease for three years, through July 31, 2024, resulting in a $1.191 million right-of-use asset and $1.210 million lease liability. Management’s March 2021 qualitative review found no indication of impairment in the $80.643 million management-contract asset. Disclosure controls were assessed as effective, with no material changes in internal control over financial reporting reported.
Important facts for investors to verify
- Whether AUM and fee revenue recover, and whether market appreciation can offset continued net redemptions.
- Fund-level flow trends: the Focus Fund had the largest reported outflows ($110 million in the quarter; $292 million for six months), while Japan Fund had the largest inflows ($23 million; $122 million).
- How the cost base and operating margins respond if revenue remains below prior-year levels.
- The continuing impact of COVID-19, market volatility, and regulatory costs, none of which management quantified.
- Dividend sustainability relative to earnings and operating cash flow.