Victory Capital Holdings, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; financial statements are unaudited. Victory Capital is a diversified asset manager whose revenues are primarily based on assets under management (AUM). Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context and operating performance
AUM was $154.3 billion at quarter-end, up 4.8% from December 31, 2020, mainly from $7.7 billion of market appreciation and $547 million of acquired assets, partly offset by $1.2 billion of net outflows. Average AUM was $151.1 billion, compared with $144.1 billion in Q1 2020. The company acquired THB Asset Management on March 1, adding $547 million of AUM and its tenth investment franchise.
Financial results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $212.9 | $204.4 | Up 4.2% |
| Investment management fees | $160.3 | $146.9 | Up 9.1% |
| Fund administration and distribution fees | $52.7 | $57.5 | Down 8.5% |
| Operating income | $89.8 | $90.6 | Down 1.0% |
| Net income | $65.2 | $57.2 | Up 14.1% |
| Diluted EPS | $0.88 | $0.77 | Up 14.3% |
| Operating cash flow | $79.6 | $51.9 | Up $27.7 |
| Adjusted EBITDA | $106.8 | $91.5 | Margin 50.2% vs. 44.8% |
| Adjusted net income | $76.7 | $61.7 | Non-GAAP |
Management also presented adjusted net income including the tax benefit from acquired goodwill and intangibles: $83.6 million for Q1 2021 versus $68.5 million in Q1 2020. The filing cautions that non-GAAP measures supplement, and do not replace, GAAP results.
Cash and cash equivalents were $30.4 million at March 31, 2021, compared with $22.7 million at year-end. Cash used in investing activities was $1.1 million and cash used in financing activities was $70.8 million, including $50.0 million of debt repayment, $7.7 million of share repurchases, and $6.4 million of dividends paid.
Term-loan principal was $738.2 million, with net debt carrying value of $722.7 million, at March 31. The company repriced its term loans in February, reducing the LIBOR margin from 2.50% to 2.25%; maturity remains July 2026. It had no revolver borrowings and approximately $100 million of undrawn revolving capacity. The company reported compliance with its financial covenant.
Material changes and management commentary
- Investment management fees increased with higher average AUM. Fund administration and distribution fees declined, reflecting lower transfer-agent fees and a shift toward lower 12b-1-paying share classes.
- Distribution and other asset-based expenses fell 23.3%, primarily due to a change in retail platform asset mix. Personnel compensation rose 24.0%, reflecting deferred-compensation changes and increased headcount, including for the direct-to-investor digital platform.
- Interest expense declined to $6.8 million from $11.4 million, helped by lower debt and interest rates. A $2.8 million debt-extinguishment loss from the repricing and repayments partly offset the benefit.
- Net outflows were $1.2 billion, comprising $1.0 billion of long-term outflows and $0.2 billion of short-term outflows. Gross flows declined to $6.8 billion from $14.9 billion in Q1 2020.
- The company repaid an additional $27 million of term loans after quarter-end, reporting total debt reduction of $388.8 million since July 2019. The board declared a $0.12-per-share quarterly dividend in May, payable June 25, 2021.
Outlook, risks, and unusual items
The filing provides no specific earnings or revenue guidance. Management said Q1 results were not materially adversely affected by COVID-19, but noted uncertainty about future effects and continued remote working and reduced travel. Management stated that operating cash flow and financing sources were positioned to meet cash needs.
Key risks include AUM declines from market performance or client withdrawals, investment performance and client retention, competition and fee pressure, reliance on third parties and technology, cyber and regulatory risks, acquisition integration, and substantial indebtedness. A 10% proportional change in AUM was estimated to change annualized revenue by approximately $87.8 million at the quarter’s 57-basis-point weighted-average fee rate.
Unusual or material items include the $95.0 million estimated USAA acquisition earn-out liability at quarter-end, with up to $112.5 million of remaining contingent payments; its fair value increased $2.5 million during the quarter. The $450 million interest-rate swap was valued as a $4.2 million asset at quarter-end. The company also had conditional Alderwood-related capital commitments of $4.5 million and $50 million to a private fund; the filing states the commitments are subject to conditions.
Important facts for investors to verify
- Whether AUM outflows persist and how market movements and investment performance affect fee revenue.
- The terms, timing, and actual amount of remaining USAA earn-out payments, and the assumptions behind their fair value.
- Debt repayment pace, variable-rate exposure outside the $450 million swap, and compliance with credit covenants.
- Whether expense trends, including compensation and distribution costs, support the reported improvement in adjusted EBITDA margin.
- The conditions and potential funding needs for Alderwood commitments, alongside any subsequent developments.