Hennessy Advisors, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2015. The filing was signed August 3, 2015. Hennessy provides investment advisory and shareholder services to 16 open-end mutual funds; revenue is primarily based on fund average daily net assets.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Total revenue | $12.0 million, up 36.2% from $8.8 million | $32.3 million, up 29.0% from $25.0 million |
| Operating income | $5.7 million, up from $3.7 million | $13.9 million, up from $10.0 million |
| Operating margin | 47.5%, versus 42.3% | 43.0%, versus 39.8% |
| Net income | $3.3 million, up 61.5% from $2.0 million | $8.0 million, up 51.4% from $5.3 million |
| Diluted EPS | $0.56, versus $0.35 | $1.34, versus $0.89 |
| Net margin | 27.6%, versus 23.3% | 24.7%, versus 21.0% |
Quarterly investment advisory fees rose 24.2% to $10.6 million, reflecting increased average daily fund assets. Shareholder service fees increased to $1.3 million from $0.2 million, in part because Hennessy began earning these fees from all funds on March 1, 2015, rather than only some funds. For the nine-month period, advisory fees were $30.0 million and shareholder service fees were $2.2 million.
Operating expenses increased 24.0% in the quarter and 22.3% for the nine months, slower than revenue growth; expenses as a share of revenue declined to 52.5% and 57.0%, respectively. Compensation and marketing/sales costs rose with business growth and profitability. Quarterly mutual fund distribution expense declined, partly because the Gas Utility Fund’s distribution plan offset certain costs; nine-month distribution expense still increased year over year.
Assets, cash flow, debt and liquidity
- Assets under management were approximately $6.07 billion at June 30, 2015, up 12.9% from a year earlier. Over nine months, net inflows were $249 million and market appreciation was $305 million. In the quarter, net inflows of $46 million were more than offset by $103 million of market depreciation; AUM fell 0.9% from March 31.
- Cash and cash equivalents were $13.9 million, versus $7.6 million at September 30, 2014. Current assets were $19.7 million and current liabilities $9.2 million. Management said cash was sufficient for the next 12 months of operations.
- Nine-month operating cash flow was $10.2 million, compared with $6.1 million in the prior-year period. Investing cash outflow was $0.2 million, versus $19.2 million, largely because the prior period included FBR Fund management-contract purchase payments. Financing cash outflow was $3.8 million; cash increased $6.2 million.
- Bank debt totaled $23.9 million, including $3.75 million current and $20.2 million long-term, down from $26.7 million at September 30, 2014. The secured loan bears interest at prime plus 0.75% (4.00% stated effective rate), requires monthly principal payments of $312,500, and is due October 2017. The company reported compliance with its covenants.
- Management contracts, the principal asset, were carried at $62.5 million; management reported no impairment indicators as of June 30, 2015. Stockholders’ equity was $44.9 million. The company paid $1.0 million in dividends during the nine months and disclosed a $0.06-per-share dividend scheduled for September 2015.
Material changes, outlook and risks
Growth in average fund assets and the expanded shareholder-services arrangement supported revenue and earnings growth. The company attributed fund inflows partly to marketing and sales efforts and fund performance; 13 of 16 funds had positive returns across the cited performance periods. Redemptions increased to an average 2.5% of AUM per month for the nine-month period, from 2.2% a year earlier.
No specific earnings or revenue guidance was provided. Management described a strategy of pursuing acquisitions and organic growth through asset retention and inflows, while emphasizing fund performance and investor service. It cited risks from redemptions, market and economic conditions, interest-rate movements, competition and regulation, and expected additional administrative and compliance costs. The company’s advisory contracts require periodic renewal and can be terminated under specified conditions. Expense-ratio limitations and related fee waivers expired or were terminated by February 28, 2015; the company said it had not voluntarily waived fees.
The filing reported no material change in lease commitments and no material change in internal control over financial reporting; management concluded disclosure controls were effective. The filing identifies tax returns open to examination and discusses ordinary lease commitments, but does not describe a material pending contingency.
Important facts for investors to verify
- Whether AUM inflows and investment performance persist, particularly given quarterly market depreciation and the increase in redemption rates.
- The durability and economics of expanded shareholder-service revenue, including any future fee waivers or fund expense limitations.
- Fund-level asset concentration and fee rates: the Gas Utility and Focus Funds were the largest by average assets, with advisory rates of 0.40% and 0.90%, respectively; the Focus Fund also incurs sub-advisor fees.
- Debt amortization, variable-rate exposure, covenant compliance, and the company’s ability to fund acquisitions while maintaining dividends.
- Potential effects of regulatory changes, competitive pressures, fund-contract renewals, and the company’s stated expectation of higher compliance costs.