Virtus Investment Partners, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Virtus provides investment management and related services to individual and institutional clients. Its revenues are primarily asset-based fees.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Total revenue | $197.9 million | $252.4 million; down 21.6% |
| Operating income | $28.6 million | $65.6 million; down 56.4% |
| Operating margin | 14.4% | 26.0% (calculated from reported revenue and operating income) |
| Net income | $34.6 million | $39.1 million; down 11.4% |
| Net income attributable to Virtus | $38.6 million | $33.1 million; up 16.8% |
| Diluted EPS | $5.21 | $4.22; up 23.5% |
| Cash flow from operating activities | $(43.0) million | $(81.8) million |
| Cash and cash equivalents | $213.4 million at March 31 | $338.2 million at December 31, 2022 |
| Corporate debt | $254.6 million carrying value; $260.9 million term-loan principal outstanding | $255.0 million carrying value at December 31, 2022 |
Reported consolidated figures include consolidated investment products (CIP), whose assets and liabilities are generally ring-fenced; CIP notes payable were $2.06 billion at March 31. The company states its exposure to consolidated CLOs is limited to its beneficial interests and accrued fees.
Assets under management and changes versus prior periods
- AUM was $154.8 billion at March 31, down $28.5 billion (15.5%) year over year, but up $5.5 billion (3.7%) from year-end 2022.
- Quarterly net outflows were $1.9 billion, versus $2.0 billion in Q1 2022. Positive market performance added $7.8 billion in Q1 2023; the year-over-year AUM decline reflected $12.8 billion of negative market performance and $13.4 billion of net outflows.
- Total sales were $6.2 billion, down 33.9% from $9.4 billion a year earlier. Average AUM fell 19.9%; the average fee rate remained approximately flat at 42.0 basis points.
- Investment management fees fell 20.5%, principally with lower average AUM. Revenue declines also reflected lower distribution and administration fees. Operating expenses fell 9.4%, including lower incentive compensation and asset-based distribution costs, but this did not offset the revenue decline.
- Operating cash use improved year over year, partly because of changes in CIP investment activity. The company paid $142.1 million in annual incentive compensation during Q1 2023. Financing cash use was $115.1 million, including dividends and contingent-consideration payments; there were no share repurchases during the quarter.
Liquidity, capital, and notable items
- At quarter-end, the company had $213.4 million in cash and $115.7 million in investments. It had $260.9 million of term-loan principal outstanding and no revolver borrowings; the revolving facility is $175 million and expires in September 2026. The term loan expires in September 2028.
- On April 1, 2023, Virtus completed its $130 million acquisition of AlphaSimplex Group. It used balance-sheet resources and, on April 3, drew $50 million on its revolver to help fund the acquisition.
- The company declared a quarterly dividend of $1.65 per share, payable May 15, 2023. Total equity was $844.3 million at March 31.
- The effective tax rate was 20.1%, compared with 30.0% in the prior-year quarter, primarily reflecting excess stock-compensation tax benefits and changes in valuation allowances. The improved attributable earnings and EPS occurred despite lower operating income, with lower taxes and a swing in investment/CIP results contributing to the comparison.
Outlook, risks, and contingencies
The filing provides no specific quantitative earnings, revenue, or AUM guidance. Management cautions that Q1 results are not necessarily indicative of full-year results. Key business sensitivities include AUM market performance and flows, competition, client and distribution relationships, personnel retention, interest rates, and the ability to meet debt obligations and covenants. The company identifies legal and regulatory proceedings as ongoing; based on information available, it does not expect them to have a material adverse effect, but notes that outcomes are inherently uncertain. Market and securities-price risk remained, with no material change in the risk disclosures from the 2022 Form 10-K.
As an unusual credit-market detail, the fair value of senior bank loans held by consolidated CLOs was $120.3 million below unpaid principal at March 31; the company reported no material collateral defaults. These CLO assets and related notes are consolidated, but the company says its economic exposure is limited to its retained interests and fees. Disclosure controls were assessed as effective, and no material change in internal control was reported.
Important facts for investors to verify
- Whether AUM flows and market performance improve or further pressure fee revenue, especially in open-end funds.
- How AlphaSimplex contributes to results and whether the acquisition affects leverage, liquidity, or integration costs; verify the post-quarter $50 million revolver draw.
- The distinction between corporate debt and consolidated CLO debt, and the company’s stated limited exposure to CLO obligations.
- The sustainability of EPS growth despite lower revenue and operating income, including the effects of tax benefits, investment marks, and noncontrolling-interest accounting.
- Cash-flow seasonality, dividend capacity, term-loan obligations, and any developments in legal or regulatory matters.