T. Rowe Price Group, Inc. — Q1 2010 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2010. T. Rowe Price earns most of its revenue from investment advisory and related services; results are sensitive to market values, asset mix, and investor flows. Assets under management (AUM) reached a record $419.0 billion, up 7.1% from year-end 2009. The filing was reviewed by the independent accounting firm, not audited.
Financial results and liquidity
| Metric | Q1 2010 | Q1 2009 or comparison |
|---|---|---|
| Total revenue | $557.1 million | $385.7 million; up 44.4% |
| Net revenue | $556.2 million | $384.5 million; up 44.7% |
| Operating expenses | $317.5 million | $273.9 million; up 15.9% |
| Net operating income | $238.7 million | $110.6 million |
| Operating margin | 42.9% | 28.8% |
| Net income | $153.0 million | $48.2 million |
| Diluted EPS | $0.57 | $0.19 |
| Operating cash flow | $256.7 million | $139.4 million |
- Investment advisory fees rose 53.8% to $471.8 million. Average AUM increased to $396.9 billion from $264.8 billion; the annualized average fee rate was 48.2 basis points, versus 47.0 basis points.
- Quarterly net inflows were $10.3 billion: $6.1 billion into U.S.-distributed sponsored funds and $4.2 billion into other portfolios. Market valuation changes and income added $17.4 billion to AUM.
- Cash and cash equivalents were $764.1 million at March 31. Cash plus sponsored mutual fund investments totaled about $1.47 billion. The company reported no debt and said it had no external liquidity facility.
- Net cash used in investing was $174.4 million, principally reflecting the $142.4 million purchase price and $1.2 million of transaction costs paid in the quarter for its UTI investment. Net cash used in financing was $61.5 million, including $70.0 million of dividends and $32.7 million of repurchases, partly offset by share-issuance proceeds and tax benefits.
- Total assets were $3.39 billion and stockholders’ equity was $3.01 billion at March 31. The quarterly dividend declared was $0.27 per share, versus $0.25 in Q1 2009.
Material changes and notable items
- Profitability improved sharply as market recovery and higher AUM lifted advisory revenue faster than expenses. Compensation costs rose 18.4%, including a $28.4 million increase in variable compensation; average headcount was down 9.7% year over year.
- Non-operating investment activity shifted to a $5.3 million gain from a $36.0 million loss. The 2009 quarter included $35.6 million of noncash impairment charges on sponsored mutual fund investments; the 2010 quarter also included $2.2 million of gains on currency hedges tied to the UTI acquisition.
- On January 20, 2010, the company acquired a 26% equity interest in UTI Asset Management Company and an affiliate for INR 6.5 billion (reported as $142.4 million), plus transaction costs. UTI earnings recognized through quarter-end were not significant.
- Money market advisory fee waivers were $6.8 million in Q1 to keep fund yields above zero. Management said waivers could continue for the rest of 2010.
Outlook, commentary, and risks
- Management estimated full-year 2010 capital expenditures of about $150 million, to be funded from cash. It expected Q2 advertising and promotion expense to be about $10 million above Q2 2009 and said full-year spending could rise up to 30% from 2009.
- Management estimated a 37.8% effective tax rate for full-year 2010; the Q1 rate was 37.3%. No specific revenue, earnings, or EPS guidance was provided.
- Management cited volatile markets and uncertainty around the global recovery. Future results depend substantially on AUM levels and composition, market performance, investor flows and confidence, investment performance, fee levels, and competition. Other risks include variable compensation, advertising, foreign exchange, operational disruptions, and regulatory or compliance changes.
- The company said pending ordinary-course claims were not expected to have a material adverse effect; it described an adverse material determination as remote. It reported no material change in previously disclosed risk factors or market-risk information.
Important facts for investors to verify
- Whether record AUM and net inflows persist, and how market returns and investor flows affect advisory revenue.
- Whether money market fee waivers continue and how they affect revenue and margins.
- Execution and performance of the UTI investment, including foreign-currency exposure and the significance of future equity-method earnings.
- Whether compensation, advertising, and other expenses develop in line with management’s estimates, and whether the projected tax rate and capital spending are realized.
- The sustainability of the Q1 margin and earnings increase, particularly given the prior-year impairment comparison and market sensitivity of the business.