TROW

Business Context and Reporting Period

Company: T. Rowe Price Group, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2007
Business Overview: The Company derives revenues primarily from investment advisory services provided to individual and institutional investors in sponsored mutual funds and other portfolios. It also provides administrative services, including transfer agent, recordkeeping, and trust services. As of June 30, 2007, 8% of assets under management (AUM) were from clients outside the United States.

Key Financial Metrics

Assets Under Management (AUM): Ended the quarter at a record $379.8 billion, an increase of 8.5% ($29.9 billion) for the quarter and 13.5% ($45.1 billion) year-to-date. Net inflows were $7.9 billion for the quarter and $17.5 billion year-to-date.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 24% in Q2 and 21% YTD, driven by a 25% increase in investment advisory fees. This growth was primarily due to higher average AUM ($370.9 billion in Q2 2007 vs. $294.1 billion in Q2 2006) rather than fee rate changes (average fee rate remained stable at ~50.2 basis points).
• Expense Increases: Operating expenses rose 19% in Q2 and 17% YTD. The primary driver was compensation and related costs, which increased due to higher interim bonus accruals (linked to performance and AUM growth), salary increases, and a larger staff (4,887 associates, up 6.1% from start of year).
• Non-Operating Income: Net non-operating income decreased $11.8 million in Q2 and $7.6 million YTD. The prior year periods included a one-time $11.5 million gain from the liquidation of a sponsored collateralized bond obligation that did not recur in 2007.
• Shareholder Returns: Dividends declared per share increased to $0.17 for Q2 (from $0.14) and $0.34 YTD (from $0.28). The Company repurchased $99.2 million of common stock YTD.

Outlook, Risks, and Management Commentary

• Market Environment: Management noted volatility in early 2007 due to concerns over inflation, energy costs, the housing market downturn, and sub-prime mortgage defaults. Despite this, U.S. equities produced strong returns in Q2 (S&P 500 up 6.3%).
• Expense Guidance: Advertising and promotion expenditures are expected to be up 12-15% for the third quarter and full year compared to 2006. Anticipated capital expenditures for property and equipment in 2007 are estimated at $145 million.
• Risk Factors: Future results depend heavily on AUM levels, which fluctuate with market performance and investor sentiment. Risks include potential termination of advisory contracts by independent fund directors, competitive pressures, regulatory changes, and foreign currency fluctuations.
• Legal Proceedings: A class action regarding the T. Rowe Price International Stock Fund (filed in 2003) remains pending. Management believes the likelihood of a material adverse effect is remote following Supreme Court rulings on federal preemption.

Investor Verification Checklist

• AUM Composition: Verify the sustainability of net inflows ($7.9B in Q2) versus market appreciation ($22.0B in Q2) to understand revenue drivers.
• Compensation Trends: Monitor the ratio of compensation costs to net revenues, as bonus accruals are tied to projected operating results and AUM growth.
• Fee Rate Stability: Confirm that the average fee rate of 50.2 basis points remains stable despite potential competitive pressures or changes in asset mix.
• Capital Allocation: Review the balance between share repurchases ($99.2M YTD) and capital expenditures ($58.8M YTD) relative to free cash flow.
• Non-Recurring Items: Ensure future comparisons account for the absence of the $11.5M one-time gain present in the 2006 period.