Business context and reporting period
AllianceBernstein Holding L.P. filed this Form 10-K for the fiscal year ended December 31, 2019. AB Holding’s principal asset and source of income is its investment in AllianceBernstein L.P. (AB), the operating partnership. AB provides investment management, research, brokerage and related services through Institutional, Retail, Private Wealth Management and Bernstein Research Services businesses.
Financial and operating performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| AB net revenues | $3.518 billion | $3.367 billion | +4.5% |
| AB operating income | $823.4 million | $825.3 million | -0.2% |
| AB net income attributable to AB Unitholders | $752.0 million | $757.6 million | -0.7% |
| AB diluted net income per unit | $2.78 | $2.78 | Flat |
| AB operating margin | 22.6% | 23.9% | -1.3 percentage points |
| AB adjusted operating margin (non-GAAP) | 27.5% | 29.1% | -1.6 percentage points |
| AB Holding net income | $238.6 million | $242.4 million | -1.6% |
| AB Holding diluted net income per unit | $2.49 | $2.50 | -0.4% |
AB’s year-end AUM was $622.9 billion, up 20.6% from $516.4 billion. The increase reflected $82.2 billion of market appreciation and $25.2 billion of net inflows. Retail generated $23.8 billion of net inflows; Institutional generated $2.4 billion; Private Wealth Management had $1.0 billion of net outflows. Average AUM increased 5.5% to $574.2 billion.
Revenue growth included higher base advisory fees (+$128.4 million), distribution revenue (+$36.5 million) and investment gains (+$36.0 million). Bernstein Research Services revenue declined 7.2% to $407.9 million; performance-based fees fell $18.5 million to $99.6 million. Expenses rose 6.0% to $2.695 billion, led by employee compensation and benefits (+$64.0 million) and promotion and servicing (+$51.7 million). AB’s adjusted diluted net income per unit, a non-GAAP measure, was $2.81 versus $2.96.
Cash flow, debt and liquidity
AB generated $827.5 million of operating cash flow in 2019, compared with $1.308 billion in 2018; the filing attributes the decline largely to movements in broker-dealer payables and consolidated fund activity. Investing activities used $23.0 million, and financing activities used $775.0 million. AB reported $679.7 million of cash and cash equivalents excluding consolidated investment funds; this balance includes broker-dealer-related cash and $448.4 million held by foreign subsidiaries. AB Holding generated $222.8 million of operating cash flow, down from $279.3 million, mainly because distributions received from AB decreased.
AB reported $560.0 million outstanding under a new $900 million committed EQH facility at year-end, bearing approximately 1.6% interest. The $800 million bank revolver and $200 million revolver had no year-end borrowings; commercial paper was also zero at year-end. AB reported $560.0 million of debt, versus $546.3 million in 2018, and compliance with credit-facility covenants. Net contractual lease payments were $978 million, including $619.2 million due after five years. AB Holding distributes its available cash flow under its partnership agreement; its 2019 cash distributions per unit were reported as $2.53. AB’s reported 2019 distributions per unit were $2.82; distributions reflect non-GAAP adjustments and are not the same as GAAP earnings.
Material changes, outlook and risks
- Margin goal: Management said achieving its 30% adjusted operating margin target by 2020 was unlikely, but remained committed to a 30% target in later years, subject to markets and business mix.
- Nashville relocation: The multi-year relocation of approximately 1,250 roles is expected to run through 2024. Management estimated $155–$165 million of transition costs and $180–$190 million of cumulative savings during that period, with $75–$80 million of annual savings beginning in 2025. It estimated a $0.06 reduction in earnings per unit in both 2019 and 2020, and cautioned that actual costs, savings and timing may differ.
- Affiliate relationship: AXA owned less than 10% of EQH at year-end. AXA notified AB of its intent to terminate approximately $14 billion of fixed-income mandates in the first half of 2020; management said the associated revenue was not significant. AB also flagged possible changes to AXA-provided services and vendor arrangements.
- Market and business risks: Results depend on market levels, AUM, investment performance, client flows and fee rates. The filing highlights active-to-passive shifts, fee pressure, competition, market volatility, foreign exchange, performance-fee variability, and reliance on major clients and distribution intermediaries. It also identifies cyber and operational risks, regulation including MiFID II and LIBOR transition, and uncertainty around Brexit and the then-emerging coronavirus outbreak.
- Other items: AB acquired Autonomous Research LLP on April 1, 2019; the filing says the acquisition did not materially affect results. AB recorded a $3.1 million intangible-asset impairment related to a prior acquisition. Management said pending or threatened legal matters could result in losses, but it could not estimate them; it did not expect the matters, individually or collectively, to materially affect results, financial condition or liquidity.
The financial statements received unqualified audit opinions, and management and the auditor concluded that internal control over financial reporting was effective as of year-end.
Investor facts to verify
- Whether AUM growth persists through net inflows, rather than relying primarily on market appreciation, and how flows and investment performance compare across channels and benchmarks.
- Whether margin and earnings trends improve as expenses rise, and whether the Nashville relocation achieves stated cost, timing and savings estimates.
- The effects of affiliate changes, including the planned AXA mandate terminations, service transitions and AB’s borrowing relationship with EQH.
- Liquidity and distribution capacity in light of cash-flow variability, debt maturities, lease commitments and the partnership’s distribution policies.
- How performance-based fees, legal and regulatory matters, and other disclosed risks affect future reported results and cash available for distributions.