Business context and reporting period
AllianceBernstein Holding L.P. (AB Holding) filed this Form 10-K for the year ended December 31, 2017. AB Holding principally owns an interest in the operating partnership, AllianceBernstein L.P. (AB), which provides investment management, research, brokerage and related services through Institutional, Retail, Private Wealth Management and Bernstein Research Services businesses. AXA and affiliates held an approximately 64.7% economic interest in AB at year-end.
Financial and operating performance
| Metric | 2017 | 2016 / change |
|---|---|---|
| AB net revenues | $3.299 billion | $3.029 billion; up 8.9% |
| Operating income / GAAP operating margin | $773.9 million / 21.7% | $723.2 million / 23.2% |
| Net income attributable to AB Unitholders | $662.4 million; diluted $2.45 per AB Unit | $673.4 million; diluted $2.47 |
| Adjusted operating income / margin (non-GAAP) | $750.1 million / 27.7% | $624.4 million / 25.3% |
| Year-end AUM | $554.5 billion | $480.2 billion; up 15.5% |
| AB operating cash flow | $645.5 million | $1.548 billion |
AUM rose by $74.3 billion, comprising $61.1 billion of market appreciation and $13.2 billion of net long-term inflows. Retail AUM grew 20.5%, Institutional 12.5% and Private Wealth Management 14.2%. Higher base advisory fees and performance-based fees drove revenue growth; performance fees were $94.8 million versus $32.8 million. Bernstein Research Services revenue fell 6.2% to $449.9 million.
Expenses increased 9.5% to $2.525 billion, outpacing revenue growth and reducing the GAAP operating margin by 1.5 percentage points. Higher compensation, general and administrative costs, distribution-related payments and real estate charges contributed. AB Holding reported net income of $207.4 million, down 4.2%, and diluted net income of $2.19 per unit, down from $2.23. Its cash distributions were $2.30 per unit; AB’s were $2.57 per unit.
Liquidity, debt and capital
AB reported $671.9 million of cash and cash equivalents excluding cash held by consolidated company-sponsored funds; management noted that this balance consisted primarily of broker-dealer operating cash and $469.9 million held by foreign subsidiaries. AB’s operating cash flow declined year over year, mainly reflecting movements in consolidated fund activity and broker-dealer balances. AB Holding generated $202.4 million of operating cash flow, compared with $169.5 million in 2016.
AB’s reported debt was $565.7 million at year-end. The filing separately reports $491.8 million of commercial paper outstanding and $75.0 million drawn under a $200 million revolving facility. A $1.0 billion committed credit facility had no borrowings; AB reported compliance with its covenants. Net operating lease commitments were $542.2 million. AB Holding distributes available cash flow under its partnership agreement, so distributions depend on cash received from AB.
Changes, outlook and notable items
- Management set a target to raise adjusted operating margin from 27.7% in 2017 to 30% by 2020. The target is conditional on assumptions including positive flows, market returns, alternatives growth and successful cost management; relocation transition costs could impede progress.
- AB began planning a second principal U.S. location, with a multi-year transition expected to involve relocation, severance and duplicate occupancy and compensation costs. Management could not yet quantify transition costs or future savings.
- A $19.7 million reserve was recorded for terminating an outsourcing contract. AB expects about $2 million of additional transition costs in 2018 and approximately $11 million in annual savings beginning in 2019.
- The 2017 Tax Cuts and Jobs Act resulted in provisional tax charges of approximately $22.5 million for deemed repatriation and $3.3 million from remeasuring deferred tax assets. The filing states that estimates remained subject to refinement.
- AB adopted the new revenue recognition standard on January 1, 2018 and estimated an approximately $35 million pre-tax cumulative adjustment to partners’ capital, principally for carried interest previously deferred.
- Investment gains were $92.1 million in 2017, including gains in consolidated company-sponsored funds and seed investments. Real estate charges were $36.7 million. These and other items affect comparability; management’s adjusted measures exclude specified items and are non-GAAP.
- Management cited continuing active-to-passive investment shifts, rising market volatility and interest-rate concerns, MiFID II’s uncertain effect on research revenue and costs, and the potential impact of AXA Equitable Holdings’ planned IPO. AXA-affiliate agreements are generally terminable on short notice, and affiliates accounted for approximately 23% of AUM and 5% of net revenue.
- Management said pending or threatened legal and regulatory matters could involve losses that were reasonably possible but not estimable; it did not expect currently known matters to have a material adverse effect, while noting outcomes remain uncertain. PwC gave an unqualified opinion on the financial statements and found internal control over financial reporting effective.
Important facts for investors to verify
- Whether net inflows persist and the extent to which AUM and fee growth depend on market appreciation, channel mix and performance fees.
- Progress toward the 2020 adjusted margin target, including relocation costs, realized savings and the treatment of non-GAAP adjustments.
- Liquidity and refinancing needs, including commercial paper, revolving borrowings, lease commitments and the composition and availability of reported cash.
- Developments in AXA-affiliate relationships and the planned IPO, and any resulting changes to client assets, services or cost-sharing arrangements.
- The final tax and revenue-recognition effects of the 2017 tax law and the 2018 accounting-standard adoption.
- MiFID II’s effect on Bernstein Research Services revenue and European research expenses, plus any material changes in litigation or regulatory contingencies.