Artisan Partners Asset Management Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Artisan is an active investment manager; revenue is primarily management fees tied to assets under management (AUM). Unless noted, financial amounts below are in U.S. dollars.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $248.7 million | $234.3 million | $726.1 million | $767.3 million |
| Operating income | $82.2 million | $78.7 million | $227.2 million | $274.1 million |
| GAAP operating margin | 33.0% | 33.6% | 31.3% | 35.7% |
| Adjusted operating margin | 32.5% | 32.9% | 31.5% | 35.1% |
| Net income attributable to APAM | $53.2 million | $44.2 million | $157.5 million | $153.9 million |
| Diluted EPS | $0.76 | $0.65 | $2.27 | $2.17 |
| Adjusted net income per adjusted share | $0.75 | $0.70 | $2.11 | $2.47 |
- AUM: $136.5 billion at quarter-end, versus $120.6 billion a year earlier and $143.0 billion at June 30, 2023. Q3 average AUM was $142.2 billion, up 7% year over year.
- Flows and markets: Q3 net client cash outflows were $1.3 billion and investment returns and other reduced AUM by $5.1 billion. For the first nine months, net outflows were $3.7 billion, partly offset by $12.5 billion of investment returns and other.
- Fees and costs: The weighted average management fee was 69.5 basis points in Q3, versus 70.0 basis points a year earlier. Q3 compensation and benefits rose 7% to $130.6 million; nine-month operating expenses rose 1% while revenue fell 5%.
- Cash flow: Nine-month operating cash flow was $262.8 million, compared with $306.6 million in 2022. Investing cash outflow was $36.5 million and financing cash outflow was $134.3 million.
- Liquidity and debt: September 30 cash and cash equivalents were $198.3 million, excluding $32.2 million held by consolidated investment products. The company had $200 million of gross senior notes outstanding, with $199.2 million carrying value, and no borrowings under its $100 million revolving facility. It reported compliance with debt covenants.
- Dividends: APAM paid $0.61 per Class A share during Q3 and declared a $0.65 quarterly dividend after quarter-end. The board’s stated policy expectation is to distribute approximately 80% of quarterly cash generation, subject to board approval.
Changes versus comparable periods
- Q3 revenue increased 6% year over year, primarily because average AUM was higher; operating income increased 4%. The operating margin nevertheless declined 0.6 percentage points.
- For the first nine months, revenue decreased 5% and operating income decreased 17%, largely reflecting lower average AUM. GAAP net income attributable to APAM increased 2%, while adjusted net income per adjusted share declined from $2.47 to $2.11.
- Reported non-operating results improved substantially: nine-month non-operating income was $43.5 million versus expense of $45.3 million in 2022. The change primarily reflected investment gains in 2023 versus losses in 2022, including gains from consolidated investment products and franchise-capital-related investments.
- Cash and cash equivalents increased from $114.8 million at year-end 2022 to $198.3 million at September 30, 2023. The reported cash-flow total also includes cash held by consolidated investment products, which is not generally available for corporate purposes.
Outlook, commentary and risks
- Management emphasizes that results can be uneven because AUM, and therefore management-fee revenue, fluctuates with markets and client flows. The filing does not provide formal earnings or revenue guidance.
- Management estimated that Artisan Funds’ November 2023 equity-fund distributions could lead to approximately $400 million of Q4 net client cash outflows from investors who do not reinvest. This is an estimate, not a guaranteed outflow.
- The company expects to pay approximately $37.2 million under its tax receivable agreements (TRAs) in 2024; it reported a $363.9 million TRA liability at September 30, 2023. Payments and estimates depend on taxable income, tax rates, and other factors; in certain circumstances payments may be accelerated or exceed realized tax benefits.
- Three strategies were closed to most new investors, and the U.S. Small-Cap Growth strategy’s capacity was being actively managed. Management said capacity limits can constrain near-term AUM growth but are intended to protect investment outcomes and client interests.
- Key risks include adverse markets and economic conditions, weak strategy performance, client outflows, loss of investment professionals, regulatory changes, and operational or reputational damage. Management reported no legal or administrative proceedings it believed would have a material adverse effect, and no material change in previously disclosed market-risk information.
- One investment product was deconsolidated after third-party capital contributions caused Artisan to lose control. The filing reported no income-statement impact from the deconsolidation; its $19.6 million investment was reclassified to investment securities.
Important facts for investors to verify
- Whether subsequent AUM and flows confirm or reverse Q3’s market-driven AUM decline and net outflows, including the estimated Q4 fund-distribution impact.
- Whether investment gains and losses, which materially affected reported non-operating income, obscure the trend in recurring fee revenue and operating profitability; review GAAP and adjusted measures together.
- Whether compensation costs, long-term incentive awards, and the adjusted-margin trend remain consistent with management’s expectations.
- The timing and amount of future TRA payments and the assumptions supporting the reported TRA liability and expected 2024 payment.
- Whether cash available to APAM, debt maturities and covenants, and the variable dividend remain supportable as business conditions and cash generation change.