Artisan Partners Asset Management Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited results. Artisan is an active investment manager; substantially all revenue comes from investment management fees tied primarily to assets under management (AUM).
Financial and operating highlights
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $242.9m | $251.4m | $477.4m | $533.0m |
| Operating income | $76.7m | $88.4m | $145.0m | $195.4m |
| GAAP operating margin | 31.6% | 35.2% | 30.4% | 36.7% |
| Net income attributable to APAM | $53.6m | $44.3m | $104.4m | $109.7m |
| Diluted EPS | $0.76 | $0.62 | $1.50 | $1.52 |
| Adjusted operating margin (non-GAAP) | 31.9% | 34.4% | 30.9% | 36.1% |
| Adjusted EPS (non-GAAP) | $0.71 | $0.79 | $1.36 | $1.76 |
Q2 average AUM was $139.3bn, down 3% year over year but up 3% sequentially; quarter-end AUM was $143.0bn. Q2 net client cash flows were negative $1.1bn, while investment returns and other added $5.7bn. For the first half, average AUM fell 10% year over year to $137.4bn; net client outflows were $2.3bn and investment returns and other added $17.6bn. The weighted average management fee was 70.1 basis points in Q2 and 70.2 basis points for the half.
Cash flow and balance sheet: First-half operating cash flow was $183.1m, investing cash outflow $35.0m and financing cash outflow $93.7m. Cash, cash equivalents and restricted cash totaled $197.6m at June 30, including $32.6m held by consolidated investment products and unavailable for general corporate purposes; APAM reported corporate cash and cash equivalents of $165.0m. Gross debt was $200.0m ($199.1m net of issuance costs), with no revolver borrowings and $100.0m available under the facility. The $200.0m senior notes mature in 2025, 2027 and 2032; the company reported compliance with debt covenants. Amounts payable under tax receivable agreements (TRAs) were $372.8m.
Material changes and management commentary
- Q2 revenue declined 3% year over year, mainly because average AUM was lower. First-half revenue fell 10%, also primarily reflecting lower average AUM; management fees were broadly stable per dollar of AUM.
- First-half operating income decreased 26%. Operating expenses declined only 2%, as lower incentive compensation and distribution costs were partly offset by higher fixed compensation and long-term incentive costs.
- APAM's Q2 and first-half GAAP net income benefited from a sharp improvement in investment results versus the prior-year periods. Q2 net investment gains from consolidated investment products were $13.5m versus an $11.9m loss a year earlier; other net investment gains were $4.2m versus a $13.4m loss. These market-sensitive items helped lift GAAP net income even as operating income and adjusted earnings weakened.
- Management describes results as sensitive to markets and AUM, and expects them to be uneven over time. It intends to invest in new capabilities where opportunity and client demand support growth. Three strategies were closed to most new investors, and the U.S. Small-Cap Growth strategy was under active capacity management.
Outlook, distributions and risks
No specific full-year revenue or earnings guidance was provided. Management said 2023 long-term incentive award expense is expected to be approximately $14m per quarter, excluding investment-return effects on franchise capital awards. The board declared a variable quarterly dividend of $0.61 per Class A share effective August 1, payable August 31; management described its current policy as targeting approximately 80% of quarterly cash generated, subject to board approval. The filing cautions dividends may vary or not be paid.
Management expected approximately $36.2m of TRA payments in 2023, of which $27.2m had been paid by June 30. TRA payments and benefits depend on future taxable income, tax rates, unit exchanges and other assumptions; in some circumstances payments may be accelerated or exceed realized tax benefits. Key business risks include adverse markets, weak investment performance, client outflows, loss of key investment professionals, regulatory changes and operational or reputational events. Management reported no legal proceeding it believed would have a material adverse effect, and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether positive investment returns can offset continued net client outflows, and how strategy-level flows and capacity limits evolve.
- How much GAAP earnings reflect underlying advisory operations versus market-sensitive gains and losses in consolidated funds and investment-linked compensation; review the non-GAAP reconciliations as well.
- Whether AUM, effective fees and operating margins stabilize or continue to decline.
- The cash available to APAM, excluding consolidated investment product assets, and the sustainability of the variable dividend under its stated cash-generation policy.
- The timing and amount of future TRA payments, and the 2025 and 2027 note maturities, revolver availability and covenant compliance.