Hennessy Advisors, Inc. — Q3 FY2021 Form 10-Q
Reporting period: Three and nine months ended June 30, 2021. The filing was dated August 4, 2021. Dollar amounts below are in millions unless noted.
Business context
Hennessy Advisors earns investment advisory and shareholder-service fees from 16 open-end mutual funds. It manages 10 funds internally and oversees sub-advisors for the other six. Fee revenue is primarily tied to funds’ average daily net assets, which vary with investment performance, investor purchases and redemptions, and market conditions.
Financial results and liquidity
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $8.53 (2020: $6.90), up 23.7% | $24.25 (2020: $26.02), down 6.8% |
| Net operating income | $3.04 (2020: $2.28) | $8.01 (2020: $9.01) |
| Operating margin | 35.6% (2020: 33.1%) | 33.0% (2020: 34.6%) |
| Net income | $2.24 (2020: $1.78), up 26.4% | $5.90 (2020: $6.37), down 7.4% |
| Diluted EPS | $0.30 (2020: $0.24) | $0.80 (2020: $0.86) |
| Operating cash flow | Not separately provided for the quarter | $7.21 (2020: $8.01) |
- Quarterly net margin was 26.3%, versus 25.7% a year earlier; nine-month net margin was 24.3%, versus 24.5%.
- At June 30, cash and cash equivalents were $14.04, total current assets $17.56, and total current liabilities $4.48. Total assets were $99.80 and stockholders’ equity was $82.19.
- No bank loan balance or interest expense was reported for the current periods. The company repaid the remaining $17.5 loan principal in March 2020.
- Nine-month investing cash outflow was $0.18 and financing cash outflow was $2.95, including $2.98 of dividends paid. Cash increased $4.08 to $14.04.
- The company declared dividends of $0.14 per share for the quarter and $0.41 per share for the nine-month period.
Material changes and operating trends
- Quarterly revenue rose as average daily fund assets increased 20.4% year over year to $4.2 billion, principally reflecting market appreciation and comparison with the pandemic-related market decline in the 2020 quarter. Quarterly operating expenses rose 19.1% to $5.49, but declined as a share of revenue to 64.4% from 66.9%.
- For the nine months, average daily assets fell 7.3% to $4.0 billion; revenue declined and net operating income fell 11.1%. Operating expenses decreased 4.5% to $16.24 but increased as a share of revenue to 67.0% from 65.4%.
- Assets under management at June 30 were $4.12 billion, up 17.9% from a year earlier, with management attributing the increase to market appreciation. In the June quarter, organic inflows of $301.7 million were more than offset by $351.9 million of redemptions; market appreciation added $144.4 million. The nine-month period also included substantial outflows, including $301 million from the Hennessy Focus Fund.
- Quarterly compensation expense increased 29.7% to $2.33, partly due to higher incentive compensation and executive salaries; the prior-year quarter included temporary executive salary reductions. Nine-month compensation was approximately flat at $6.69.
- The $80.64 management-contract asset was unchanged from September 2020. Management reported no impairment based on its June qualitative assessment. The $12.40 net deferred tax liability is principally associated with tax write-off timing for that asset.
Outlook, risks and other notable items
- No quantified earnings, revenue, or AUM guidance was provided. Management said cash and other liquid assets were expected to cover capital requirements for at least one year from the financial statements’ issuance date.
- Management identified redemptions, fund performance, market fluctuations, economic conditions, interest rates, competition, regulation, and COVID-19 effects as factors that could affect results. The company said the pandemic’s future impact on its financial condition, liquidity, and results remained uncertain.
- Management’s strategy emphasizes acquisitions and organic growth through asset retention and fund inflows. It also highlighted continued focus on fund performance and investor service.
- The Novato office lease was renewed for three years through July 31, 2024. The resulting right-of-use asset was $1.10, with lease liabilities totaling $1.09 at June 30.
- The filing reported no significant contingencies beyond operating leases and no material subsequent events. Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether fund-level inflows, redemptions, and market performance sustain or reverse the recent AUM increase; advisory fees depend on average daily assets.
- Why nine-month revenue and earnings declined despite the strong June quarter, and whether cost levels and margins are durable as pandemic-related expense measures unwind.
- The performance and asset-retention outlook for funds with notable outflows, particularly the Focus and Gas Utility funds.
- The assumptions underlying the $80.64 management-contract valuation and future impairment assessments; this asset represents a substantial portion of total assets.
- The continuing effects of COVID-19, market volatility, interest rates, inflation, and regulatory costs, which management said could materially affect the business.