Victory Capital Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Financial statements are unaudited. Amounts are in U.S. dollars; financial statement figures below are in millions unless stated otherwise.
Business context and reporting period
Victory Capital is a diversified asset manager with 12 investment franchises and a solutions platform. It reported $154.9 billion of AUM at June 30, 2022, down from $178.1 billion at March 31, 2022. The WestEnd acquisition, completed at the end of 2021, added to the business and its debt burden.
Financial and operating metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $216.0 | $221.9 | $446.0 | $434.9 |
| Operating income | $119.3 | $95.3 | $220.9 | $185.0 |
| Net income | $79.2 | $69.3 | $150.5 | $134.5 |
| Diluted EPS | $1.09 | $0.93 | $2.05 | $1.81 |
| Adjusted EBITDA | $106.2 | $112.2 | $220.6 | $219.1 |
| Adjusted EBITDA margin | 49.2% | 50.6% | 49.5% | 50.4% |
- Q2 revenue declined 2.7% year over year; six-month revenue increased 2.6%. Quarterly investment management fees were nearly flat, while fund administration and distribution fees fell 11.1%, mainly reflecting lower mutual fund average net assets.
- Q2 net income rose 14.3% and six-month net income rose 11.9%. Operating income included a $26.6 million Q2 and $30.1 million six-month benefit from reductions in the estimated fair value of acquisition consideration payable. These noncash gains materially affect period comparisons.
- Revenue on average AUM was 52.3 basis points in Q2 versus 56.2 basis points a year earlier; for the first half it was 52.5 basis points versus 56.7 basis points.
- AUM fell 13.0% from March 31, primarily due to $21.7 billion of market depreciation; Q2 net client outflows were $0.7 billion. For the first half, AUM fell 15.6% from year-end as $29.9 billion of market depreciation more than offset $2.3 billion of net inflows.
- Cash provided by operations was $165.1 million for the first half, versus $164.2 million in 2021. Investing activities used $7.2 million and financing activities used $184.6 million. Cash declined to $42.7 million from $69.5 million at year-end.
- At June 30, principal debt outstanding was $1.036 billion and net debt carrying value was $1.017 billion. The company repaid $115 million of term debt during the first half. It had approximately $100 million available under its revolving facility, no revolver borrowings, and reported compliance with its financial covenant.
- Interest expense and other financing costs rose to $9.9 million in Q2 from $6.2 million and to $19.2 million for the first half from $13.0 million. A $450 million interest-rate swap hedges part of the floating-rate debt through July 2026.
Material changes versus prior comparable periods
- Quarterly revenue decreased despite increased average AUM, while first-half revenue grew; management attributed first-half investment management fee growth to higher average AUM, partly offset by lower revenue realization.
- Q2 adjusted EBITDA and margin declined year over year; first-half adjusted EBITDA increased slightly while margin eased. The filing attributes higher first-half personnel costs partly to sales-based and incentive compensation, headcount, and acquisition-related compensation.
- Depreciation and amortization increased substantially, primarily from acquired intangible assets associated with WestEnd and NEC. Higher debt and interest rates also increased financing costs.
- Quarterly client flows shifted to net outflows from modest net inflows in Q2 2021. First-half net flows improved to $2.3 billion of inflows from $1.0 billion of outflows in the prior-year period.
Outlook, commentary, risks, and unusual items
- The filing provides no specific revenue, earnings, AUM, or margin guidance. Management says results depend substantially on AUM levels, investment performance, client flows, product mix, and fee rates.
- Management states that COVID-19 had not materially adversely affected results to date, but the pandemic’s future effects remained uncertain. The filing highlights market declines and client withdrawals as risks to AUM-linked revenue and earnings; currency movements, competition, key-person retention, technology and cybersecurity, regulation, litigation, acquisitions, and substantial indebtedness are also identified risks.
- WestEnd contributed $14.6 million of revenue in Q2 and $29.2 million for the first half. The company’s maximum WestEnd earn-out is $320 million; estimated fair value at June 30 was $221.4 million. USAA AMCO contingent consideration had an estimated fair value of $57.0 million, with up to $75.0 million potentially payable.
- The board authorized a $100 million share-repurchase program in May 2022. The company repurchased $26.3 million of shares in the first half; $89.7 million remained authorized at June 30. First-half dividends paid were $34.7 million, and dividends declared were $0.50 per share.
- After quarter-end, the company reduced debt principal by $25.6 million through repayments and open-market purchases. Alderwood decided to wind down; Victory withdrew as a member, ended its additional capital commitments, and received back the $1.5 million contribution made in January. On August 4, the board approved a $0.25-per-share quarterly dividend payable in September.
- The company reported no material legal proceedings and no material changes to the risk factors in its 2021 Form 10-K. 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
- How market movements, subsequent client flows, and asset-class mix affect AUM, effective fee rates, and revenue after June 30.
- The assumptions and sensitivity of the WestEnd and USAA AMCO earn-out valuations, which generated significant noncash gains in the reported period.
- Debt repayment plans, variable-rate exposure, interest expense, and the transition from LIBOR under the credit agreement.
- Whether acquisition integration and acquired intangible amortization affect future costs and operating margins; compare GAAP results with the company’s non-GAAP measures.
- Future share repurchases and dividends relative to cash generation, liquidity, and debt obligations.