T. Rowe Price Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. The interim financial statements are unaudited and prepared under U.S. GAAP.
Business context
The company earns most of its revenue from investment advisory fees, which depend primarily on assets under management (AUM) and asset mix. It also earns administrative and servicing fees and carried interest from affiliated private funds. Management says the persistent shift toward passive investing has weighed on new client inflows, while it continues to invest in people, technology, distribution, and products. T. Rowe Price completed its acquisition of retirement-income software firm Retiree, Inc. on April 20, 2023; transaction terms were not material.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net revenue | $1,610.2 million | $1,513.0 million | $3,147.8 million | $3,376.0 million |
| Net operating income | $533.5 million | $668.6 million | $1,017.7 million | $1,546.0 million |
| Net income attributable to T. Rowe Price | $476.4 million | $339.6 million | $897.9 million | $907.5 million |
| Diluted EPS | $2.06 | $1.46 | $3.89 | $3.88 |
| GAAP operating margin | 33.1% | 44.2% | 32.3% | 45.8% |
- Q2 revenue rose 6.4%, chiefly because carried-interest income improved by $165.0 million year over year from a loss in the prior-year quarter. Investment advisory fees declined 4.4%, reflecting lower average AUM. For the first half, revenue fell 6.8%, as advisory fees declined 10.6%, partly offset by improved carried interest.
- Average AUM was $1,357.4 billion in Q2, down 3.5% year over year; first-half average AUM was $1,340.2 billion, down 9.6%. Ending AUM reached $1,399.4 billion, up 6.8% year over year. Q2 market appreciation of $77.7 billion was offset in part by $20.0 billion of net outflows; first-half appreciation of $160.8 billion was offset by $36.1 billion of outflows.
- Operating expenses increased 27.5% in Q2 and 16.4% in the first half on a GAAP basis. The supplemental savings plan liability was a major driver of the year-over-year expense increase; higher carried-interest compensation and technology and facility costs also contributed. On a non-GAAP basis, Q2 operating expenses rose 8.3%, and first-half expenses rose 3.1%.
- Non-operating income was $106.2 million in Q2 and $241.6 million for the first half, versus losses in 2022, reflecting investment gains amid stronger markets. This supported GAAP EPS comparisons; first-half non-GAAP diluted EPS declined 16.1% to $3.71.
- First-half cash from operating activities was $906.5 million as reported, versus $1,727.0 million in 2022. The company-attributable amount was $1,261.0 million, down from $1,659.8 million. Cash and cash equivalents on the balance sheet were $2,249.7 million at June 30, up from $1,755.6 million at year-end.
- Total assets were $12.62 billion; total liabilities were $2.17 billion; and total stockholders’ equity was $9.47 billion. The filing identifies $100.0 million of debt associated with affiliated CLO investments, reported in accounts payable and accrued expenses. It does not provide a clear figure for other conventional borrowings.
Liquidity, capital allocation, and outlook
- Management reported $4.74 billion of cash and investments in T. Rowe Price products, including $2.73 billion of cash and discretionary investments. Some seed and consolidated-product investments are not immediately available for general operations. The company says it does not maintain an external source of additional liquidity, citing available resources and expected operating cash flows.
- First-half cash uses included $562.4 million of dividends paid and $50.4 million of share repurchases in the cash flow statement. The company declared dividends of $2.44 per share for the first half; its recurring quarterly dividend was raised 1.7% to $1.22 per share in February 2023.
- Management expects 2023 capital expenditures, including internal labor capitalization, of about $365 million, with approximately 60% planned for technology initiatives. It estimates a full-year 2023 effective tax rate of 26%–30% on a GAAP basis and 26.5%–29.5% on a non-GAAP basis. No full-year revenue, AUM, or earnings guidance is stated in the provided filing text.
- Management notes that results remain sensitive to market levels and composition, client flows, investment performance, fee rates, interest rates, inflation, competition, and regulation. It also describes expenses and investment income as subject to market-related volatility.
Material changes, risks, and unusual items
- The sharp contrast in carried interest and investment gains between periods materially affects reported comparisons. Carried interest is based on estimated fund values and can fluctuate quarter to quarter, whether or not underlying investments have been realized.
- Supplemental savings plan compensation expense is market-driven and partly offset by gains or losses on designated economic hedges; the swings affected GAAP operating margins.
- The OHA acquisition earnout liability fell to $23.0 million from $95.8 million at year-end, with a $72.8 million fair-value reduction recognized in first-half earnings. Up to $900 million of contingent cash consideration may be payable in 2025–2027 if specified revenue targets are met.
- Commitments include $481.5 million to fund OHA products over four years and $125.9 million of unfunded capital commitments to unconsolidated variable-interest entities. The filing reports a maximum risk of loss of $1,084.7 million related to those entities, including investment carrying values, commitments, and receivables. Alternatives AUM also had $12.2 billion of unfunded commitments, which are not included in fee-basis AUM.
- Management considers the likelihood of a material adverse outcome from ordinary-course claims remote. No material changes to previously disclosed risk factors or market risks were reported. The interim financial information received a review by KPMG; it was not an audit.
Important facts for investors to verify
- Whether market appreciation can offset continued net outflows, particularly in equity products, and how flows affect AUM and advisory-fee revenue.
- How sustainable reported earnings are after separating carried-interest and investment-market gains from recurring advisory operations; compare GAAP and non-GAAP results and their reconciliations.
- Whether fee-rate and product-mix trends, investment performance, and the passive-investing trend affect client retention and future inflows.
- The sensitivity of expenses and earnings to supplemental savings plan valuations, technology spending, and carried-interest compensation.
- The timing and potential funding needs of OHA, VIE, and alternatives commitments, and the terms and future valuation of the OHA earnout.
- Whether the stated tax-rate and capital-expenditure estimates remain current; the filing gives no broader full-year earnings or revenue forecast.