Hamilton Lane Incorporated — Form 10-Q Summary
Reporting period: Three months ended June 30, 2018 (the company’s fiscal first quarter of fiscal 2019). Unless otherwise indicated, amounts are in U.S. dollars. Comparisons are with the three months ended June 30, 2017.
Business context
Hamilton Lane provides private-markets investment management and advisory services to institutional clients. At June 30, 2018, it reported approximately $45 billion of customized separate-account AUM, $11 billion of specialized-fund AUM and $415 billion of AUA. Fee-earning AUM was $30.5 billion, compared with $27.6 billion a year earlier.
Financial performance and liquidity
- Revenue: $63.4 million, up 20%. Management and advisory fees were $51.0 million, down 1%; incentive fees were $12.4 million, versus $1.0 million.
- Expenses and earnings: Total expenses rose 33% to $37.7 million. Net income was $23.1 million versus $25.6 million; income attributable to Hamilton Lane Incorporated was $8.8 million versus $5.5 million. Basic and diluted Class A EPS were $0.40 and $0.39, respectively, versus $0.30 for each measure.
- Margins and non-GAAP measures: Fee Related Earnings were $20.8 million versus $23.8 million; Adjusted EBITDA was $30.4 million versus $26.5 million. The filing does not present a GAAP operating-margin measure.
- Cash flow: Operating cash flow was $37.9 million versus $29.2 million. Investing activities used $8.1 million and financing activities used $23.7 million. Cash, cash equivalents and restricted cash increased $6.1 million to $55.4 million, including $53.6 million of cash and cash equivalents at quarter-end.
- Debt and liquidity: Debt carrying value was $83.7 million at June 30; principal outstanding was approximately $84.0 million. The company had a $25 million revolving facility, with $10.45 million drawn at quarter-end; it repaid that balance on July 12, 2018. Management said it expects operating cash flows, existing cash and potential external financing to meet liquidity needs.
- Other balance-sheet items: Total assets were $306.7 million and total liabilities were $161.8 million. Investments were $141.2 million. The company declared $0.2125 per Class A share in quarterly dividends; $4.7 million was accrued at quarter-end.
Changes versus the prior-year quarter
- Revenue growth was driven by a $11.4 million increase in incentive fees. Management attributed much of this to a customized separate account and a co-investment fund; $2.7 million of recognized carried interest did not generate current-period cash receipts.
- Management and advisory fees declined primarily because prior-year specialized-fund revenue included $5.8 million of retroactive fees from a secondary fund. Growth in customized accounts and advisory/reporting fees partly offset the decline.
- Compensation and benefits increased $6.7 million to $26.6 million, including $2.8 million of contingent compensation related to the RAPM acquisition and higher incentive-fee compensation. General and administrative expenses rose $2.6 million.
- Equity in investees shifted to a $0.1 million loss from $5.9 million of income, reflecting weaker direct/co-investment results and lower gains from customized accounts. This contributed to lower consolidated net income despite higher revenue.
- Fee-earning AUM declined $0.1 billion during the quarter: customized-account AUM fell $0.7 billion, partly offset by a $0.6 billion increase in specialized funds.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or revenue guidance. Management expects compensation and benefits to generally rise with business growth, headcount and incentive-fee activity.
- Management identified market and investment-performance exposure, fee-structure and fundraising risks, employee retention, regulatory and tax matters, debt-covenant compliance, client or investor defaults, and the availability of distributions from HLA to fund dividends, taxes and other expenses. A 100-basis-point increase in interest rates was estimated to increase interest expense by $0.8 million over the next 12 months.
- Unrecognized carried interest subject to continuing contingencies was $292.9 million at quarter-end; the company had received and deferred $3.7 million. Potential related employee and third-party payments of $73.2 million were not recorded because payment was not yet probable. Management said no pending or known threatened legal matter was expected to materially affect the financial statements.
- ASC 606 adoption on April 1, 2018 produced a $1.0 million cumulative-effect increase to equity; management said it did not change the historical revenue-recognition pattern. The accounting impact of the Tax Act remained incomplete, with no change to previously recorded provisional amounts.
- After quarter-end, an acquisition of an entity in which the company held an investment closed on August 2; the company estimated a gain of approximately $7.6 million for the fiscal second quarter. A $0.2125 quarterly dividend was declared August 7.
Most important facts for investors to verify
- Whether incentive-fee growth recurs and converts into cash, given its dependence on fund performance, realization timing and clawback conditions.
- Whether recurring management and advisory fees and fee-earning AUM stabilize after the quarter’s customized-account distributions.
- The sustainability of expense growth, particularly compensation, acquisition-related contingent payments and professional fees.
- Debt repayments, compliance with loan covenants, and the company’s ability to fund investment commitments, member distributions and dividends.
- The final accounting and expected realization of the post-quarter acquisition gain and the remaining Tax Act effects.