Victory Capital Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Financial statements are unaudited. Amounts are in U.S. dollars; financial figures are generally shown in millions unless noted. Victory is an asset manager whose revenues are primarily based on assets under management (AUM). Results include the USAA asset management and mutual fund businesses acquired on July 1, 2019, so year-over-year comparisons are not directly like-for-like.
Key financial and operating metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $204.4 million | $87.5 million |
| Operating income | $90.6 million | $22.1 million |
| Net income | $57.2 million | $14.5 million |
| Diluted EPS | $0.77 | $0.20 |
| Operating cash flow | $51.9 million | $17.9 million |
| Adjusted EBITDA and margin | $91.5 million; 44.8% | $33.6 million; 38.4% |
| Adjusted net income | $61.7 million | $21.9 million |
Calculated GAAP operating margin was approximately 44.3% in Q1 2020 versus 25.3% in Q1 2019. Investment management fees were $146.9 million, while fund administration and distribution fees were $57.5 million. Average AUM was $144.1 billion and revenue on average AUM was 57 basis points, compared with 62 basis points in Q1 2019.
At March 31, 2020, AUM was $123.8 billion, down $28.1 billion, or 18.5%, from year-end 2019. The decline reflected $25.2 billion of negative market action and $2.9 billion of net outflows. Gross flows were $14.9 billion. The filing reports 44% of strategies by AUM outperformed benchmarks over one year, 55% over three years, 69% over five years and 79% over ten years.
Cash and cash equivalents were $37.1 million, and the $100 million revolving credit facility was undrawn. Long-term debt was $914.0 million principal, or $888.6 million net of unamortized financing costs and discount. Total liabilities were $1.15 billion and stockholders’ equity was $581.1 million. The company generated $51.9 million of operating cash flow, used $2.2 million in investing activities and used $49.6 million in financing activities. Financing uses included $38.0 million of debt repayment, $6.0 million of share repurchases and $3.5 million of dividends.
Material changes versus the prior comparable period
- Revenue, operating income and net income increased substantially, primarily reflecting the USAA acquisition and its associated AUM and services. The acquisition also added personnel, distribution, transfer-agent, transition-service and other operating costs.
- Investment management fees rose 97.4% to $146.9 million; administration and distribution fees rose 340.3% to $57.5 million, including $20.7 million of USAA transfer-agent fees.
- Distribution and other asset-based expenses increased to $54.9 million from $15.8 million, principally due to acquisition-related platform distribution and other costs. Personnel expense increased to $47.6 million from $34.5 million.
- Interest and financing costs increased to $11.4 million from $4.6 million, reflecting higher acquisition-related debt. The company repriced its term loans in January, reducing the LIBOR margin from 3.25% to 2.50%, and recorded a $1.1 million debt-extinguishment loss.
- In March, the company entered a swap fixing the rate at 3.465% on $450 million of debt through July 2026. Its March 31 fair-value liability was $6.3 million.
Outlook, risks and unusual items
- Management said COVID-19 had not materially adversely affected reported first-quarter results, but warned that the pandemic’s duration, market effects, client activity, vendor impacts and employee productivity could materially affect future business and results. No quantified earnings guidance was provided.
- The business is exposed to market declines and client withdrawals because fees depend largely on AUM. Management estimated that a 10% AUM change, proportionately across strategies, would change annualized revenue by approximately $70.6 million at the quarter’s weighted-average fee rate.
- Management stated that operating cash flows and financing sources were positioned to meet needs, while noting continued monitoring of pandemic-related liquidity and receivables risks. The company was in compliance with its financial covenant and had no revolving borrowings at quarter-end.
- USAA acquisition contingent consideration was estimated at $113.2 million at March 31, down $5.5 million during the quarter; the fair-value decrease benefited operating results. Maximum potential contingent payments are $150 million over four years.
- Subsequent to quarter-end, the company repurchased $31 million of term loans; debt reduction since the July 2019 acquisition totaled $217 million. The board declared a further $0.05-per-share dividend payable June 25, 2020.
- The filing reports no material legal proceedings. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much of the year-over-year revenue and earnings growth reflects the USAA acquisition versus underlying organic growth, and how acquisition-related expenses and synergies develop.
- Whether AUM stabilizes after the sharp market-driven decline, and the direction of client flows, investment performance and realized fee rates.
- Debt reduction, interest costs, covenant headroom and the continuing effect of the $450 million interest-rate hedge.
- Liquidity and cash conversion as pandemic-related market volatility and operating needs evolve; Q1 operating cash flow included working-capital movements.
- Assumptions and potential payment range for USAA contingent consideration, including the revenue performance of eligible assets.