Hennessy Advisors, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2023. The interim financial statements are unaudited. Hennessy Advisors earns primarily investment advisory fees based on the average assets of its 16 mutual funds and one ETF, plus shareholder service fees.
Financial performance and position
| Metric | Three months ended Mar. 31, 2023 | Three months ended Mar. 31, 2022 | Six months ended Mar. 31, 2023 | Six months ended Mar. 31, 2022 |
|---|---|---|---|---|
| Revenue | $5.916 million | $7.745 million | $12.061 million | $16.279 million |
| Net operating income | $1.592 million | $2.673 million | $3.197 million | $5.460 million |
| Net income | $1.195 million | $1.602 million | $2.314 million | $3.515 million |
| Diluted EPS | $0.15 | $0.21 | $0.30 | $0.46 |
| Net operating margin | 26.9% | 34.5% | 26.5% | 33.5% |
| Net income margin | 20.2% | 20.7% | 19.2% | 21.6% |
- Revenue and earnings: Quarterly revenue fell 23.6% and six-month revenue fell 25.9%. Management attributed the declines mainly to lower average fund assets, driven primarily by net outflows. Advisory fees were down 24.4% for the quarter and 26.7% year to date; shareholder service fees were down 14.0% and 15.8%, respectively.
- Cash flow: Six-month operating cash flow was $1.955 million, versus $3.543 million a year earlier. Investing activities used $0.526 million, including $0.413 million of payments related to management contracts. Financing activities used $2.047 million, largely reflecting $2.051 million in dividends. Cash declined $0.618 million to $57.869 million.
- Liquidity and debt: At March 31, cash and cash equivalents were $57.869 million and current assets were $60.946 million, against current liabilities of $2.635 million. Notes payable, net of issuance costs, were $39.014 million; the notes have $40.25 million aggregate principal, bear interest at 4.875%, and mature December 31, 2026. Management said available cash and liquid assets were expected to meet capital needs for at least one year after issuance of the report.
- Other balance-sheet items: Total assets were $142.974 million, including $81.071 million in management contracts; total liabilities were $55.885 million and equity was $87.089 million. The company reported no impairment indicator for management contracts in its qualitative review.
- Shareholder returns: Cash dividends declared were $0.14 per share for the quarter and $0.28 per share for the six-month period. A quarterly dividend of $0.1375 per share was paid March 6, 2023.
Material changes and business developments
- Assets under management were $2.844 billion at March 31, 2023, down 25.2% from $3.804 billion a year earlier. For the March 2023 quarter, $85.950 million of organic inflows and $24.946 million of market appreciation were more than offset by $276.391 million of redemptions.
- For the six months, average assets under management were approximately $3.0 billion, down 24.0% from the comparable period. The largest six-month net outflows were from the Japan Fund ($140 million), Focus Fund ($133 million), and Gas Utility Fund ($63 million). Redemptions averaged 3.2% of AUM per month for the six months, compared with 2.5% a year earlier.
- Operating expenses declined in dollars but rose as a share of revenue: 73.1% for the quarter versus 65.5%, and 73.5% for six months versus 66.5%. General and administrative costs increased, primarily due to professional services; lower incentive compensation and reduced sub-advisory fees partly offset the revenue decline.
- Interest income increased to $0.580 million for the quarter and $1.047 million for six months, from negligible amounts a year earlier, reflecting rising interest rates on cash. Interest expense also increased, to $0.562 million and $1.125 million, respectively.
- The company completed its Stance ETF management-asset purchase in December 2022; the ETF added approximately $43 million of AUM at closing.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management described its strategy as retaining and growing existing fund assets and pursuing acquisitions, while emphasizing investment performance and investor service.
- Management cited redemptions, market and fund performance, interest rates, inflation, economic conditions, competition, and changing regulation as factors affecting results. It noted recession and tighter-credit concerns amid slowing growth and banking-sector uncertainty, and expected regulatory developments to add administrative and compliance costs.
- On April 26, 2023, the company announced a definitive agreement to acquire management of two Community Capital Management equity funds. Payment at closing is set at 1.25% of their aggregate NAV measured two trading days before closing. The company expected completion during calendar 2023; the transaction is subject to customary conditions, including fund shareholder approval, and the funds are intended to reorganize into the Hennessy Stance ESG ETF.
- Contractual expense-ratio limitations require fee waivers for three funds. Waivers totaled $0.08 million for the six months, versus $0.05 million a year earlier. The filing reports no other significant contingencies with original terms exceeding one year.
- The notes may be redeemed at the company’s option on or after December 31, 2023. Management stated additional capital could be sought through bank financing or capital markets if needed, but gave no assurance it could be raised.
- Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether fund outflows and lower AUM persist, and how that affects advisory-fee revenue and cash generation.
- Completion, shareholder approval, closing price, and integration of the proposed CCM fund transaction.
- Future operating margins, particularly the effect of lower revenue, professional-services costs, and fee waivers.
- Cash yields and note interest costs, as well as the terms and implications of any decision to redeem the 2026 Notes.
- The valuation assumptions supporting the $81.1 million management-contract asset and the company’s conclusion that no impairment was indicated.