Business context and reporting period
Victory Capital Holdings, Inc. (NASDAQ: VCTR) is a diversified asset manager with 12 investment franchises and a solutions platform. This unaudited Form 10-Q covers the three months ended March 31, 2022; comparisons are with the three months ended March 31, 2021 unless otherwise stated. Victory reported $178.1 billion of period-end AUM and 129 investment strategies.
Financial and operating performance
Dollar amounts below are in millions except per-share data and where noted.
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Total revenue | $230.0 | $212.9 | Up 8.0% |
| Investment management fees | $179.5 | $160.3 | Up 12.0%, reflecting higher average AUM |
| Fund administration and distribution fees | $50.6 | $52.7 | Down 4.0% |
| Operating income | $101.5 | $89.8 | Operating margin approximately 44.1% versus 42.2% |
| Net income | $71.3 | $65.2 | Up 9.3% |
| EPS, basic / diluted | $1.04 / $0.97 | $0.96 / $0.88 | Both increased |
| Adjusted EBITDA (non-GAAP) | $114.4 | $106.8 | Margin 49.7% versus 50.2% |
| Cash from operating activities | $74.8 | $79.6 | Down $4.8 |
| Cash and cash equivalents, quarter-end | $38.6 | $69.5 at Dec. 31, 2021 | Declined $31.0 during the quarter |
The effective income tax rate was 21.3% in both periods. Average AUM was $176.9 billion versus $151.1 billion; reported revenue yield on average AUM was 53 basis points versus 57 basis points. AUM ended the quarter at $178.1 billion, down 3.0% from year-end 2021: $8.3 billion of negative market action and $0.3 billion of negative net transfers were partly offset by $3.0 billion of net inflows. Gross flows were $11.1 billion, compared with $6.8 billion a year earlier.
Quarter-end long-term debt, net of issuance costs and discount, was $1,060.5 million; term-loan principal was $1,081.2 million, down $70.0 million from year-end following repayments. Cash was $38.6 million, and the company reported approximately $100 million of undrawn revolving credit availability. Interest expense and financing costs rose to $9.2 million from $6.8 million. Operating cash flow was $74.8 million; investing cash use was $4.1 million and financing cash use was $101.6 million, mainly for debt repayment, dividends, share repurchases, and taxes on net share settlements.
Material changes versus the prior comparable period
- Revenue and net income grew, supported by higher average AUM, while fund administration and distribution revenue declined.
- Personnel compensation rose 10.0% to $64.9 million, driven by headcount and acquisition-related compensation, sales commissions, and incentive compensation. Depreciation and amortization increased to $10.6 million from $4.4 million, primarily reflecting acquired intangible assets from NEC and WestEnd.
- Interest and other financing costs increased, reflecting a higher debt balance over the comparable period. A $1.6 million debt-extinguishment loss was recorded, versus $2.8 million in Q1 2021.
- Adjusted EBITDA increased, but its margin eased to 49.7% from 50.2%. The company’s AUM was higher than a year earlier, but quarter-end AUM fell from year-end 2021 as markets declined.
- WestEnd, acquired on December 31, 2021, contributed $14.6 million of revenue in Q1 2022; 2021 reported results did not include WestEnd.
Outlook, commentary, risks, contingencies and unusual items
- The filing provides no specific earnings, revenue, AUM, or margin guidance. Management states that Q1 results are not necessarily indicative of full-year results.
- Management says operating cash flow and financing sources are positioned to meet needs, while noting continued monitoring of liquidity and COVID-19 uncertainty. Key business sensitivities include market-driven AUM changes, client withdrawals, investment performance, fee rates and asset mix.
- Acquisition-related contingent consideration was estimated at $305.0 million at March 31, 2022: $66.0 million for the remaining USAA earn-out and $239.0 million for WestEnd. NEC may involve up to $35.0 million of additional payments based on revenue growth; the filing treats these payments as compensation for post-acquisition services.
- The company’s debt is primarily floating-rate and references LIBOR, with a contractual alternative-rate mechanism as LIBOR is phased out. A $450 million interest-rate swap hedges part of the debt through July 2026; the remaining debt is exposed to interest-rate changes.
- Subsequent to quarter-end, the company prepaid $20 million of incremental term loans, authorized a new share repurchase program of up to $100 million after the existing program, and approved a $0.25 quarterly dividend payable June 27, 2022. No material legal proceedings were reported; the filing states there were no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether net inflows continue and offset market-driven AUM declines, including performance and flows by asset class and distribution channel.
- Whether fee yield and asset mix stabilize, given reported revenue yield of 53 basis points versus 57 basis points a year earlier.
- Debt repayment capacity, floating-rate exposure, covenant compliance, and cash available after dividends, buybacks, and acquisition-related payments.
- Assumptions and potential cash requirements underlying the USAA and WestEnd earn-outs, and the integration and revenue contribution of WestEnd and NEC.
- How reported GAAP results compare with non-GAAP measures: Adjusted EBITDA and Adjusted Net Income exclude specified costs and should not be viewed as substitutes for GAAP results.