Victory Capital Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparisons are with the same 2022 periods unless noted. Victory Capital is a diversified asset manager, reporting $153.5 billion in assets under management (AUM) at quarter-end. Financial statements are unaudited.
Financial and operating results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $209.7 million | $207.3 million | $615.2 million | $653.3 million |
| Income from operations | $80.0 million | $98.6 million | $242.1 million | $319.5 million |
| Net income | $52.0 million | $72.8 million | $158.0 million | $223.2 million |
| Diluted EPS | $0.77 | $1.01 | $2.30 | $3.07 |
| Adjusted EBITDA and margin | $107.2 million; 51.1% | $103.6 million; 50.0% | $310.4 million; 50.5% | $324.1 million; 49.6% |
| Operating cash flow | Not separately provided for the quarter | $233.2 million | $268.1 million |
Q3 investment management fees rose 2.0% to $164.0 million, while fund administration and distribution fees declined 1.6% to $45.7 million. Nine-month revenue fell 5.8%, primarily reflecting lower average AUM. Nine-month net income declined 29.3%; operating income was also lower. Adjusted EBITDA, a non-GAAP measure, increased in Q3 but declined for the nine-month period.
- AUM and flows: Quarter-end AUM was $153.5 billion, up from $147.3 billion a year earlier but down $8.1 billion from June 30. The quarterly decline reflected $4.9 billion of market depreciation, $1.7 billion of net outflows and $1.3 billion of INCORE divested assets. Nine-month net outflows were $5.4 billion, versus $1.7 billion of net inflows in 2022.
- Liquidity and debt: Cash and cash equivalents were $108.0 million at September 30, versus $38.2 million at year-end 2022. Long-term debt, net, was $988.3 million; term-loan principal was $1.002 billion. The $100 million revolving facility was undrawn, and the company reported compliance with its financial covenant. Operating cash flow was $233.2 million; financing cash outflow was $157.1 million, including $81.8 million of share repurchases and $64.8 million of dividends.
- Margins, distributions and capital returns: Revenue on average AUM was 51.6 basis points in Q3, versus 51.8 basis points a year earlier. The quarterly dividend declared was $0.32 per share, compared with $0.25. No shares were repurchased in Q3; $51.9 million remained available under the current repurchase program at quarter-end.
Material changes and unusual items
- Interest expense and other financing costs increased to $15.6 million in Q3 from $11.5 million, largely due to higher average interest rates. For nine months, the expense rose to $44.7 million from $30.6 million.
- Acquisition consideration remeasurement added $10.3 million to Q3 operating expenses, compared with a $10.5 million reduction in the year-ago quarter. For nine months, the expense was $19.2 million versus a $40.6 million reduction in 2022. WestEnd earn-out fair value was $213.2 million at September 30; the USAA AMCO final earn-out payable was $36.4 million.
- A $3.8 million impairment of an indefinite-lived trade name was recorded in depreciation and amortization. The filing says the asset’s remaining carrying value will be amortized over a shortened period.
- On September 1, Victory divested its INCORE investment franchise, including $1.3 billion of AUM, and reported restructuring and integration costs related to the divestiture.
- After quarter-end, Victory paid the $36.4 million final USAA AMCO earn-out on October 10 and monetized its interest-rate swap on October 30, generating $43.4 million net of costs. The Board approved a $0.32-per-share quarterly dividend on November 2, payable December 22.
Outlook, commentary and risks
The filing provides no specific revenue, earnings or AUM guidance. Management notes that results depend substantially on AUM levels, market performance, client flows, asset mix and fee rates. A 10% AUM change, proportionately across strategies, would change annualized revenue by approximately $80.1 million at the reported weighted-average fee rate. Key disclosed risks include market declines and withdrawals, investment performance, competition and fee pressure, retention of investment professionals, reliance on third parties and technology, acquisition integration, regulation, litigation and substantial indebtedness. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter; it reported no material legal proceedings and no material changes to the 2022 Form 10-K risk factors.
Important facts for investors to verify
- Whether net outflows persist, and how much of reported AUM movement reflects client flows, market returns or divestitures.
- How rising borrowing costs affect earnings and cash generation, including the impact of the post-quarter swap monetization and remaining variable-rate debt.
- Whether WestEnd earn-out estimates and payments change; the September 30 estimate was $213.2 million, with up to $320 million potentially payable.
- Whether the revenue and earnings trend improves, particularly given lower nine-month revenue and net income despite higher Q3 revenue.
- Whether share repurchases and dividends remain sustainable alongside debt obligations, contingent consideration and operating needs.