Victory Capital Holdings, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; financial statements are unaudited. Victory Capital is an investment manager whose revenue is primarily linked to assets under management (AUM). Unless otherwise noted, financial figures below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $87.5 million | $105.0 million; down 17% |
| Operating income | $22.1 million | $27.3 million; down 19% |
| Net income | $14.5 million | $10.5 million; up 38% |
| Diluted EPS | $0.20 | $0.16 |
| Adjusted EBITDA (non-GAAP) | $33.6 million; 38.4% of revenue | $39.8 million; 37.9% of revenue |
| Adjusted Net Income (non-GAAP) | $21.9 million | $23.1 million |
| Operating cash flow | $17.9 million | $25.9 million |
| Cash and cash equivalents | $66.3 million at March 31 | $51.5 million at December 31, 2018 |
| Long-term debt | $269.3 million carrying value; $280.0 million principal | $268.9 million carrying value at December 31, 2018 |
- AUM was $58.1 billion at quarter-end, up 10% from $52.8 billion at December 31, 2018, primarily reflecting $6.5 billion of market appreciation, partly offset by $1.1 billion of net outflows. Average AUM was $57.0 billion versus $62.0 billion in Q1 2018.
- Gross flows were $3.0 billion, compared with $3.7 billion a year earlier. Net outflows were $1.1 billion versus $0.6 billion. Global/non-U.S. equity had net inflows; U.S. mid-cap and large-cap equity contributed most to outflows.
- Operating cash flow declined $7.9 million year over year; the company attributed the decrease primarily to lower revenue from lower average AUM. Cash increased $14.8 million during the quarter.
- Liquidity included $66.3 million cash and a fully undrawn $100 million revolving credit facility. The filing reports accounts and other receivables of $42.8 million and accounts and other payables of $44.3 million.
Material changes and drivers
- Revenue declined 17%, reflecting lower average AUM and a change in the presentation of fund expense reimbursements. Under the newly adopted revenue standard, $4.1 million of reimbursements reduced revenue and operating expenses in Q1 2019; prior-year figures were not restated. This presentation change reduced reported revenue but did not itself reduce operating income.
- Fund administration and distribution fees fell 17%, primarily due to lower average mutual-fund AUM and a shift toward lower 12b-1-paying share classes.
- Operating expenses fell 16% to $65.4 million. Lower asset-based expenses, personnel costs, general and administrative expenses, and amortization more than offset $2.8 million of acquisition-related costs.
- Net income rose despite lower operating income, helped by lower interest expense and the absence of the $6.1 million debt-extinguishment loss recorded in Q1 2018. Q1 2019 interest and financing costs were $4.6 million versus $7.1 million.
- Adjusted EBITDA declined to $33.6 million, while its margin edged up to 38.4% from 37.9%. These are non-GAAP measures; the company’s adjustments include acquisition costs, amortization, stock compensation, and financing items.
Outlook, transactions, and risks
- No specific earnings or revenue guidance was provided. Management noted that interim results are not necessarily indicative of full-year results. AUM, fee revenue, and earnings are exposed to market movements, investment performance, client withdrawals, and changes in asset and channel mix.
- The USAA AMCO acquisition remained pending, with closing expected July 1, 2019, subject to client consents and other closing conditions. The stated base purchase price was $850 million, plus potential contingent payments of up to $150 million over four years. The related committed term loan was reduced from up to $1.395 billion to $1.130 billion after the Harvest transaction was terminated.
- On April 22, 2019, after quarter-end, Victory and Harvest mutually terminated the Harvest purchase agreement without a termination fee. The Harvest financing commitment also terminated.
- Management identified risks including AUM declines and investment underperformance, reliance on key personnel and third parties, cybersecurity and technology exposure, regulatory and litigation risk, substantial indebtedness, and the ability to close and integrate the USAA acquisition. The filing reported no material change to previously disclosed risk factors and no material legal proceedings.
- At March 31, 2019, the company had $280 million of term-loan principal outstanding at a 5.25% interest rate. It made no term-loan repayments during the quarter while accumulating cash for acquisition financing. The company also had $5.6 million remaining under its share repurchase authorization.
Most important facts for investors to verify
- Whether the USAA acquisition closed as expected, the final purchase price and financing, and the resulting debt and integration costs.
- Whether net outflows—especially in U.S. mid-cap and large-cap equity—continued, and how market movements affected AUM and fee rates.
- How comparable revenue and margins look after accounting for the $4.1 million revenue/expense presentation change and the company’s non-GAAP adjustments.
- Whether operating cash generation and liquidity can support debt service, repurchases, and acquisition-related needs.
- Whether investment performance, client consents, or other acquisition conditions materially changed after the filing date.