Business context and reporting period
Victory Capital Holdings, Inc. is an investment manager operating a multi-boutique platform. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019; the comparable periods are 2018. Unless noted otherwise, figures below are in U.S. dollars.
Assets under management (AUM) were $64.1 billion at June 30, up 10.3% from $58.1 billion at March 31, 2019 and 2.9% from $62.3 billion a year earlier. The quarter-over-quarter increase reflected $3.7 billion of net inflows and $2.3 billion of market appreciation.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $91.4 million | $104.4 million | $178.8 million | $209.4 million |
| Operating income | $22.7 million | $29.7 million | $44.9 million | $57.0 million |
| Net income | $14.4 million | $18.7 million | $28.9 million | $29.2 million |
| Diluted EPS | $0.20 | $0.26 | $0.40 | $0.42 |
| Adjusted EBITDA | $36.6 million | $40.7 million | $70.2 million | $80.5 million |
| Adjusted EBITDA margin | 40.0% | 39.0% | 39.2% | 38.4% |
Reported operating margin was approximately 24.9% in Q2 2019 versus 28.4% in Q2 2018, and 25.1% for the first half of 2019 versus 27.2% in the prior-year period. Adjusted EBITDA and Adjusted Net Income are non-GAAP measures; the company presents them as supplemental measures, not substitutes for GAAP results.
- Revenue and fees: Investment management fees were $78.0 million in Q2, down 12.3%; administration and distribution fees were $13.3 million, down 13.5%. Average AUM was $60.1 billion, versus $61.6 billion in Q2 2018. Revenue yield on average AUM was 61.0 basis points, versus 68.0 basis points.
- Cash flow: First-half operating cash flow was $49.3 million, compared with $59.6 million in 2018. Investing activities used $2.5 million and financing activities used $2.9 million. Cash, cash equivalents and restricted cash totaled $95.3 million at June 30, including $71.9 million held in escrow for the pending acquisition.
- Debt and liquidity: At June 30, debt principal under the then-existing credit agreement was $280.0 million; its balance-sheet carrying value, net of unamortized costs and discount, was $269.8 million. Cash and cash equivalents excluding restricted cash were $23.4 million, and the $100.0 million revolving facility was undrawn. Total assets were $841.1 million and total liabilities were $354.1 million.
Material changes versus the prior comparable period
- Q2 revenue declined $13.0 million and net income declined $4.3 million year over year. First-half revenue fell $30.5 million, while net income was nearly flat, down $0.3 million.
- Management attributed lower fee revenue mainly to lower average AUM, changes in fund and share-class mix, and a lower effective fee yield. First-half AUM nevertheless rose from $52.8 billion at year-end 2018 to $64.1 billion, supported by $2.6 billion in net inflows and $8.7 billion in market appreciation.
- Distribution and other asset-based expense fell, partly because of a presentation change: beginning in 2019, fund waivers and expense reimbursements reduce investment management fee revenue rather than being reported as expense. This reduced both revenue and expense by $4.1 million in Q2 and $8.2 million in the first half; prior periods were not restated.
- First-half 2018 included a $6.1 million loss on debt extinguishment, which did not recur in 2019. Lower interest expense also supported the comparison, while acquisition-related and restructuring costs increased in 2019.
Outlook, transactions, risks and unusual items
- USAA acquisition: The company completed its acquisition of USAA’s asset management and shareholder-services businesses on July 1, 2019, after the reporting period. The approximately $850 million cash purchase price was subject to adjustments, with up to an additional $150 million of contingent payments tied to specified revenue over four years. The acquired businesses’ results and assets are not included in the June 30 financial statements. Purchase accounting and pro forma information were not yet available in this filing.
- Post-quarter financing: The acquisition was financed with a new seven-year $1.1 billion term loan and company resources; a five-year $100 million revolving facility was established and was undrawn at closing. The term loan carried a stated rate option of LIBOR plus 3.25% or an alternate base rate plus 2.25%. The prior credit agreement was repaid and terminated. After June 30, the company repaid $20 million, reducing new term-loan principal to $1.08 billion.
- Other transactions and capital returns: Victory mutually terminated the Harvest acquisition agreement on April 22, 2019 without a termination fee. On August 12, it announced a quarterly cash dividend of $0.05 per share beginning in Q3 2019. The company also repurchased $3.5 million of stock during the first half; $3.7 million remained authorized for repurchases at June 30.
- Management commentary: Management highlighted strong Q2 net flows, especially in Solutions, and reported that 71% of fund and ETF AUM carried four- or five-star Morningstar ratings. These performance measures are historical and do not assure future results. The filing provides no specific earnings or revenue guidance.
- Risks and contingencies: Revenue and earnings depend substantially on AUM, investment performance, client flows, market levels, and fee mix. The filing also identifies acquisition integration, substantial indebtedness, key-person retention, competition, regulation, cybersecurity, third-party service providers, and potential litigation or impairment as risks. The company reported no material legal proceedings and no material changes to the prior annual-report risk factors, except for the new dividend and regulatory developments. It noted that Regulation Best Interest and Form CRS compliance could increase costs.
Important facts for investors to verify
- How USAA integration, acquired AUM and the direct member channel affect flows, fee yields, costs and earnings; confirm the finalized purchase-price allocation and contingent-payment terms.
- The new $1.08 billion term-loan balance, actual interest costs, repayment plans, covenants and available liquidity following the acquisition.
- Whether positive net flows persist and whether growth is concentrated in lower-fee strategies; compare AUM growth with average AUM and revenue yield.
- How much of the reported year-over-year expense improvement reflects recurring operating efficiency versus accounting reclassification or one-time items.
- The sustainability and funding of the $0.05 quarterly dividend alongside acquisition debt and any further repurchases.