Victory Capital Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Victory Capital is a diversified asset manager; results include the USAA asset-management and transfer-agency businesses acquired July 1, 2019. Financial amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $188.7 | $215.0 | $575.0 | $393.8 |
| Operating income | $80.6 | $55.6 | $237.0 | $100.4 |
| Net income | $55.7 | $26.0 | $157.6 | $54.9 |
| Diluted EPS | $0.76 | $0.35 | $2.14 | $0.75 |
| Adjusted EBITDA | $95.6 | $96.3 | $273.5 | $166.5 |
| Adjusted EBITDA margin | 50.7% | 44.8% | 47.6% | 42.3% |
Q3 investment-management fees were $137.2 million, down 11.7% year over year; administration and distribution fees were $51.4 million, down 13.7%. For the nine-month comparison, both revenue categories grew substantially, primarily reflecting the USAA acquisition and its transfer-agent revenue. Management reported average AUM of $135.4 billion for the 2020 nine-month period versus $87.7 billion in 2019, which included only a partial year of USAA.
Quarterly net income rose despite lower revenue, alongside lower operating expenses, interest costs and acquisition-related charges than in Q3 2019. Nine-month comparisons are also materially affected by the acquisition. Adjusted net income was $66.7 million in Q3 and $186.7 million for nine months; the filing separately reports tax benefits from acquired goodwill and intangibles of $6.7 million and $20.2 million, respectively.
AUM, cash flow and balance sheet
- AUM was $132.7 billion at September 30, down from $145.8 billion a year earlier. Q3 AUM increased $3.6 billion from June 30 due to $6.6 billion of market appreciation, partly offset by $3.0 billion of net outflows. Nine-month net outflows were $17.8 billion; money-market and short-term outflows were $8.3 billion, primarily attributed to Schwab’s acquisition of USAA’s investment management company.
- Operating cash flow for the first nine months was $182.7 million versus $167.7 million. Investing cash use was $10.5 million versus $845.9 million, the prior-year period including the USAA acquisition. Financing cash use was $153.0 million versus $705.7 million of cash provided in 2019.
- Cash and cash equivalents were $56.3 million at September 30, compared with $37.1 million at year-end 2019. The $100 million revolving facility was undrawn. The filing reports no borrowings under the revolver and compliance with the financial covenant.
- Term-loan principal was $837.2 million, down from $952.0 million at year-end 2019; net debt carrying value was $815.9 million. The January repricing reduced the LIBOR margin from 3.25% to 2.50%, with maturity in July 2026. A swap fixed the rate at 3.465% on $450 million through maturity; the swap liability was $11.8 million.
- At September 30, the company recorded $120.5 million of acquisition contingent consideration. It had repurchased $22.8 million of common stock and paid $11.5 million in dividends during the first nine months.
Changes, outlook and risks
- Revenue on average AUM was 56.4 basis points in Q3 versus 58.5 basis points in Q3 2019. Management cited lower average AUM and reduced fee realization for the quarterly decline.
- Management said COVID-19 had not materially adversely affected reported results through September 30, but warned that future effects remain uncertain and may depend on market conditions, client activity, the pandemic’s duration and operational impacts.
- The filing provides no specific earnings or revenue guidance. Management said operating cash flows and financing sources were positioned to meet needs, while continuing to monitor liquidity.
- Key risks include market-driven AUM declines and client withdrawals, investment performance, fee-rate and asset-mix changes, dependence on third-party distributors and service providers, substantial debt, acquisition integration, and cybersecurity, regulatory and litigation exposures. A 10% AUM change, if proportionately spread across strategies, was estimated to change annualized revenue by approximately $74.5 million.
- Potential obligations include up to $150 million in USAA acquisition earnouts over four years; the company expected to pay the maximum $37.5 million for the first earnout period in Q4 2020. It also disclosed conditional capital commitments of $4.5 million to Alderwood and $50 million to an Alderwood-sponsored fund.
- Subsequent events: after quarter-end, the company repaid another $20 million of term-loan principal. In November it announced a $0.07 quarterly dividend, a new $15 million share-repurchase authorization and a planned acquisition of THB Asset Management, which manages approximately $435 million.
Most important facts for investors to verify
- Whether AUM outflows persist, particularly in money-market, fixed-income and U.S. equity strategies, and how flows affect fee realization.
- How much earnings growth reflects recurring operations versus the USAA acquisition, cost reductions and non-GAAP adjustments.
- Debt repayment pace, interest-rate exposure, covenant headroom and the eventual USAA earnout payments.
- Progress and economics of integrating USAA, the planned THB acquisition and the conditional Alderwood commitments.
- Whether COVID-19, market volatility or changes in client activity materially affect AUM, revenue, liquidity or operating costs.