T. Rowe Price Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Financial amounts are in U.S. dollars; monetary figures are in millions unless otherwise noted. The interim financial statements are unaudited and were reviewed by KPMG.
Business context
T. Rowe Price earns most of its revenue from investment advisory fees, which depend primarily on assets under management (AUM) and their mix. It also earns administrative, distribution, and servicing fees and carried-interest income. Management cited ongoing investment in technology, talent, distribution, and products, alongside persistent industry shifts toward passive investing that have weighed on new client inflows.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenues | $1,670.7 | $1,588.2 | $4,818.5 | $4,964.2 |
| Net operating income | $581.3 | $574.6 | $1,599.0 | $2,120.6 |
| Net income attributable to T. Rowe Price | $453.2 | $384.4 | $1,351.1 | $1,291.9 |
| Diluted EPS | $1.97 | $1.66 | $5.86 | $5.54 |
| GAAP operating margin | 34.8% | 36.2% | 33.2% | 42.7% |
- Q3 revenue increased 5.2%; nine-month revenue declined 2.9%. Investment advisory fees rose 1.5% in Q3 but fell 6.8% year to date. Carried-interest income was $66.1 million in Q3 and $121.7 million year to date, compared with $1.1 million and a loss of $80.8 million, respectively, in 2022.
- Q3 GAAP operating expenses increased 7.5% to $1,089.4 million; nine-month expenses rose 13.2% to $3,219.5 million. On the company’s adjusted non-GAAP basis, operating expenses rose 3.2% in both periods. Adjusted diluted EPS was $2.17 for Q3 and $5.88 year to date, versus $1.86 and $6.28 in 2022.
- Ending AUM was $1,346.5 billion, up $71.8 billion from year-end 2022 but down $52.9 billion from June 30. Q3 outflows were $17.4 billion and market depreciation was $35.5 billion; year-to-date outflows of $53.5 billion were more than offset by market appreciation of $125.3 billion. Average AUM was $1,393.6 billion in Q3 and $1,358.2 billion year to date.
- The annualized effective investment advisory fee rate was 41.7 basis points in Q3 and 42.2 basis points year to date, down from 42.5 and 42.8 basis points, respectively, in the comparable periods. Management attributed the decline primarily to asset mix shifts toward lower-fee classes and vehicles.
- Reported operating cash flow for the first nine months was $1,376.5 million, versus $2,494.6 million in 2022. Reported investing cash flow was positive $38.1 million, versus negative $69.5 million; financing cash flow was negative $617.2 million, versus negative $1,616.7 million. These reported totals include consolidated investment products.
- Cash and cash equivalents were $2,578.7 million at September 30, 2023, versus $1,755.6 million at December 31, 2022. Management reported $5,016.3 million of cash and investments in T. Rowe Price products as liquidity, while noting that consolidated fund assets are not available for general operations or to general creditors. Total liabilities were $2,375.2 million; the filing does not present a separate consolidated debt total. It reports $96.1 million of debt associated with affiliated CLO investments.
- Dividends paid were $842.0 million for the nine months. The company repurchased 1.398 million shares for $151.4 million during that period.
Material changes and unusual items
- Q3 GAAP EPS benefited from investment gains compared with investment losses in Q3 2022. Nine-month non-operating income was $244.4 million, versus a loss of $561.2 million in 2022, largely reflecting the change in investment results.
- Q3 carried-interest income increased substantially year over year, reflecting stronger absolute and relative performance in affiliated funds. Such accrued income can fluctuate with fund valuations and may be recognized before underlying investments are realized.
- Expense comparisons were affected by market-related changes in the supplemental savings plan liability and by fair-value reductions in OHA acquisition contingent consideration. The contingent consideration liability was $23.0 million at September 30, 2023; its nine-month fair-value reduction was $72.8 million.
- Management cited severance related to a July workforce action, higher technology spending, and carried-interest-related compensation as cost pressures. It also cited a non-recurring recovery of costs incurred in Q3 2022 as a partial offset.
- The company completed its acquisition of retirement-income software firm Retiree, Inc. on April 20, 2023; terms were described as not material. It committed $412 million to fund OHA products over the next four years.
Outlook, risks, and contingencies
- Management estimated a full-year 2023 effective tax rate of 26%–30% on a GAAP basis and 26.5%–29.5% on a non-GAAP basis. It anticipated approximately $332 million of 2023 capital expenditures, about 60% directed to technology initiatives.
- The filing does not provide full-year revenue, earnings, or AUM guidance. Management emphasized that results depend on market performance, AUM composition and flows, investment results, fee rates, and expenses.
- Risks discussed include market volatility, higher interest rates and inflation, competition and passive-investing trends, relative investment performance, client flows, regulation, foreign exchange, and the ability to attract and retain talent. Management reported no material change to the risk factors in its 2022 Form 10-K.
- Management considered an adverse material outcome from ordinary-course claims, including employment-related claims, remote. No material change in market risks or internal control over financial reporting was reported. Disclosure controls were deemed effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether AUM outflows, particularly in equity strategies, continue and how they affect advisory fees and the effective fee rate.
- How much reported earnings depend on carried-interest accruals and investment gains, including the potential volatility or reversal of those items.
- Whether expense growth, severance, and technology investment affect operating margins beyond the periods reported.
- Whether the estimated 2023 tax-rate range and capital expenditure plan remain current.
- The accessibility and composition of reported liquidity, including the distinction between corporate resources and assets held in consolidated investment products.
- Progress and potential funding requirements for the $412 million OHA commitment and the contingent consideration earnout, which may be payable beginning in 2025 subject to defined revenue targets.