Victory Capital Holdings, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. The unaudited quarterly report covers the three and nine months ended September 30, 2022, compared with the same 2021 periods. Victory Capital is an asset manager with 12 investment franchises and a multi-asset Solutions Platform. AUM was $147.3 billion at quarter-end.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $207.3 million | $226.3 million | $653.3 million | $661.1 million |
| Operating income | $98.6 million | $99.0 million | $319.5 million | $284.0 million |
| Net income | $72.8 million | $74.2 million | $223.2 million | $208.6 million |
| Diluted EPS | $1.01 | $1.00 | $3.07 | $2.81 |
| Adjusted EBITDA / margin | $103.6 million / 50.0% | $115.0 million / 50.8% | $324.1 million / 49.6% | $334.1 million / 50.5% |
- Q3 GAAP operating margin was approximately 47.6%, versus 43.8% a year earlier; nine-month margin was approximately 48.9%, versus 43.0%. Lower expenses included favorable changes in acquisition earn-out valuations.
- Investment management fees fell 6.2% in Q3 to $160.8 million, while nine-month fees rose 1.7% to $508.4 million. Fund administration and distribution fees declined 15.4% in Q3 and 10.2% year to date, primarily reflecting lower mutual-fund assets.
- Average revenue yield on AUM declined to 51.8 basis points in Q3 from 55.3 basis points, and to 52.3 basis points for nine months from 56.2 basis points.
- Cash from operations was $268.1 million for nine months, compared with $264.1 million. Investing used $7.7 million; financing used $263.1 million, including $134.0 million of debt repayments, $61.5 million of share repurchases, and $52.1 million of dividends. Cash ended at $66.7 million.
- At September 30, long-term debt, net, was $999.8 million; term-loan principal was $1.017 billion. The company had approximately $100 million available on its revolving facility and reported compliance with its financial covenant. Gross term-loan principal less cash was approximately $950.6 million.
- Total assets were $2.589 billion and stockholders’ equity was $1.067 billion. Acquisition consideration payable was $267.9 million.
Material changes versus comparable periods
- Q3 revenue decreased 8.4% year over year, while net income decreased 1.9%; diluted EPS increased from $1.00 to $1.01. For nine months, revenue declined 1.2%, while net income increased 7.0% and diluted EPS rose from $2.81 to $3.07.
- Quarter-end AUM fell 5.0% from June 30, 2022, mainly from $7.1 billion of market depreciation and $0.6 billion of net outflows. Compared with September 2021, AUM was down from $159.9 billion. Year to date, AUM declined $36.4 billion, principally from $37.0 billion of market depreciation, partly offset by $1.7 billion of net inflows.
- Interest expense and other financing costs increased to $11.5 million in Q3 from $5.9 million, and to $30.6 million for nine months from $18.9 million, reflecting higher debt and interest rates. Depreciation and amortization also increased, primarily due to acquired intangible assets from NEC and WestEnd.
- Q3 and nine-month results included favorable $10.5 million and $40.6 million changes, respectively, in acquisition consideration value, compared with expenses of $2.4 million and $10.6 million in the prior-year periods. These valuation changes are a material, non-cash earnings factor.
Outlook, commentary, risks, and unusual items
- The filing provides no specific financial guidance. Management states that results depend substantially on AUM levels and composition, investment performance, client flows, market conditions, and effective fee rates.
- Management disclosed that a 10% proportionate change in AUM would affect annualized revenue by approximately $76.4 million at the Q3 weighted-average fee rate. The filing also describes higher revenue sensitivity if the change were concentrated in mutual funds, or lower sensitivity if concentrated in institutional separate accounts.
- Interest-rate exposure remains on unhedged debt. A $450 million interest-rate swap hedges part of the floating-rate debt through July 2026; the company transitioned its credit agreement and swap from LIBOR conventions to SOFR conventions in 2022.
- After quarter-end, the company paid $37.5 million for the third annual USAA AMCO earn-out and reduced term-loan principal by approximately $9 million. The board subsequently declared a $0.25-per-share quarterly dividend payable December 23, 2022.
- Key stated risks include market-driven AUM declines and client withdrawals, investment performance, competition, retaining investment and senior personnel, acquisitions and integration, cybersecurity and technology dependence, regulation and litigation, and substantial indebtedness. The company reported no material change to its previously disclosed risk factors, no current material legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- How market movements, client flows, and product mix are affecting AUM, revenue yield, and fee realization.
- Whether the earnings trend excluding acquisition earn-out revaluations and acquisition-related amortization remains consistent with reported results.
- Debt balances, floating-rate exposure, swap coverage, interest costs, covenant headroom, and liquidity after subsequent earn-out and debt payments.
- The assumptions and potential payment ranges for the USAA AMCO and WestEnd contingent consideration, including the remaining earn-out obligations.
- Capital allocation and share-count effects from dividends, repurchases, and employee equity awards.