Victory Capital Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Figures are unaudited; financial amounts are in U.S. dollars. Victory is an asset manager whose fee revenue is primarily linked to assets under management (AUM).
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $204.2 million | $216.0 million | $405.5 million | $446.0 million |
| Operating income | $87.5 million | $119.3 million | $162.1 million | $220.9 million |
| Net income | $56.7 million | $79.2 million | $105.9 million | $150.5 million |
| Diluted EPS | $0.83 | $1.09 | $1.53 | $2.05 |
| Adjusted EBITDA | $104.0 million | $106.2 million | $203.2 million | $220.6 million |
| Adjusted EBITDA margin | 50.9% | 49.2% | 50.1% | 49.5% |
Revenue fell 5.5% in Q2 and 9.1% year to date; net income fell 28.4% and 29.6%, respectively. Management attributed lower fees principally to lower average AUM. Investment management fees were down 5.2% in Q2 and 9.0% year to date; administration and distribution fees were down 6.4% and 9.3%. Derived GAAP operating margins were approximately 42.9% in Q2 2023 versus 55.2% in Q2 2022, and 40.0% versus 49.5% for the six-month periods.
The operating-income comparison was materially affected by acquisition earnout revaluations: Q2 2023 included a $1.5 million expense, versus a $26.6 million gain in Q2 2022; the six-month figures were an $8.9 million expense versus a $30.1 million gain. Adjusted EBITDA is a non-GAAP measure and excludes specified items; it should be considered alongside GAAP results. Adjusted net income was $66.4 million for Q2 and $132.1 million for the first half; including the reported tax benefit of acquired goodwill and intangibles, the respective amounts were $75.9 million and $151.1 million.
AUM, cash flow, debt and liquidity
- AUM was $161.6 billion at June 30, 2023, up 4.3% from $154.9 billion a year earlier. Q2 market appreciation of $5.5 billion more than offset $2.4 billion of net outflows. First-half market appreciation of $12.5 billion was partly offset by $3.7 billion of net outflows. Gross flows were lower year over year: $5.8 billion in Q2 versus $9.3 billion, and $11.9 billion in the first half versus $20.5 billion.
- Operating cash flow was $141.6 million for the first half, down from $165.1 million. Investing activities used $3.9 million and financing activities used $132.0 million. Cash and cash equivalents were $43.8 million at June 30, 2023, compared with $38.2 million at year-end 2022.
- Long-term debt, net, was $987.4 million; term-loan principal outstanding was $1.002 billion. The company had no revolver borrowings and approximately $100 million of undrawn revolving capacity. It reported compliance with its financial covenant. The loans carry variable rates; a swap fixes the rate on $450 million of debt at 3.149% through July 2026. First-half interest expense and financing costs rose to $29.1 million from $19.2 million; cash interest paid was $32.7 million.
- Acquisition-related contingent consideration was $239.3 million at June 30, including $205.6 million for WestEnd and $33.7 million for USAA AMCO. These estimates are sensitive to unobservable assumptions, including revenue growth and discount rates.
Capital returns and company developments
Victory repurchased 2.4 million shares for $77.4 million during the first half and paid $43.6 million in dividends. A new $100 million repurchase program was authorized in March 2023; $51.9 million remained available at quarter-end. The declared dividend was $0.32 per share in Q2, and a further $0.32 quarterly dividend was approved on August 3, payable September 25, 2023.
On April 24, 2023, Victory introduced the Victory Capital InVest brand and announced Marketplace, an open-architecture brokerage platform for individual investors. Management cited 65% of fund and ETF AUM as having four- or five-star overall Morningstar ratings; benchmark-relative performance varied by measurement period.
Outlook, risks and unusual items
The filing provides no specific earnings or revenue guidance. Management notes that interim results are not necessarily indicative of full-year results. Revenue and profitability are exposed to market changes and client flows because most fees depend on AUM; shifts toward lower-fee products or clients may also reduce the weighted-average fee rate. Other disclosed risks include investment performance, retaining key personnel, technology and cybersecurity, regulation, acquisition integration, litigation, and substantial indebtedness. The company states that it does not hedge its overall AUM market exposure. A 10% change in AUM, assuming a proportional change across strategies, would change annualized revenue by approximately $84.2 million at the Q2 weighted-average fee rate.
No material changes to the risk factors in the 2022 Form 10-K were reported. The company stated it was not party to any material legal proceedings. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether net outflows persist, particularly in Solutions and fixed-income strategies, and how flows and markets affect AUM and fee revenue.
- How much of the earnings decline reflects underlying operations versus the year-over-year reversal in acquisition earnout valuation gains, and how non-GAAP adjustments reconcile to GAAP.
- Variable-rate debt exposure, future interest costs, covenant headroom, and the timing and amount of the $239.3 million contingent consideration obligations.
- Capital allocation trade-offs among share repurchases, dividends, debt reduction, and investment in the new Marketplace platform.
- Assumptions supporting WestEnd and USAA AMCO earnout valuations, as well as investment performance and fee-rate trends.