Hennessy Advisors, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2022; comparisons are with the three months ended December 31, 2021 unless noted. Financial statements are unaudited. Hennessy provides investment advisory services to 16 mutual funds and one ETF, and shareholder services to mutual-fund investors.
Key financial results
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Revenue | $6.145 million | $8.534 million | Down 28.0% |
| Operating expenses | $4.540 million | $5.747 million | Down 21.0% |
| Net operating income | $1.605 million | $2.787 million | Down 42.4% |
| Operating margin | 26.1% | 32.7% | Down 6.6 percentage points |
| Net income | $1.119 million | $1.913 million | Down 41.5% |
| Diluted EPS | $0.15 | $0.25 | Down $0.10 |
| Operating cash flow | $(0.032) million | $1.159 million | Decreased $1.191 million |
Net margin was 18.2%, versus 22.4%. Investment advisory fees were $5.654 million, down 28.8%; shareholder service fees were $0.491 million, down 17.6%. The effective tax rate rose to 25.8% from 16.1%; the prior-year rate benefited from a California tax refund. The company declared dividends of $0.14 per share in both periods.
Assets, liquidity and debt
- Assets under management (AUM) at December 31 were $3.009 billion, down 26.1% year over year. Average AUM for the quarter was $3.044 billion, down 25.7% year over year.
- Cash and cash equivalents were $57.050 million, compared with $58.487 million at September 30, 2022. Current assets were $60.154 million and current liabilities $2.685 million.
- Cash decreased $1.437 million during the quarter. Investing activities used $0.381 million, including $0.317 million related to the Stance ETF management-asset purchase; financing activities used $1.024 million, primarily for dividends. Operating cash flow was slightly negative, partly reflecting a $1.989 million reduction in accrued liabilities and accounts payable.
- Notes payable, net of issuance costs, were $38.943 million. The notes have $40.25 million aggregate principal, bear interest at 4.875%, and mature December 31, 2026. The company may redeem them on or after December 31, 2023. Management said cash and other liquid assets should cover capital requirements for at least one year from issuance of the report and longer-term requirements; additional financing may be considered if needed.
Material changes and operating developments
- Lower AUM reduced advisory and shareholder-service revenue. Management attributed the year-over-year AUM decline about equally to market depreciation and net outflows. Monthly redemptions averaged 3.4% of AUM, up from 2.0% a year earlier.
- The largest quarterly net outflows were from the Hennessy Focus Fund ($109 million), Gas Utility Fund ($36 million), and Japan Fund ($21 million). The largest net inflows were Japan Small Cap ($4 million), Cornerstone Growth ($3 million), and Total Return ($1 million).
- All 17 funds generated positive returns in the quarter, according to management. The Dow Jones Industrial Average rose 16.01% during the period. Hennessy completed its purchase of management-related assets for the Stance ETF on December 22, adding approximately $43 million of AUM at closing; the ETF had $4.125 million in average AUM for the quarter.
- Operating expenses fell in dollars, but rose to 73.9% of revenue from 67.3%, as fixed expenses represented a larger share of lower revenue. General and administrative expense increased 12.1% to $1.569 million, mainly due to professional services. Sub-advisory expense fell 48.4% to $0.969 million, reflecting lower AUM and the cessation of certain sub-advisory payments in 2022.
- Interest expense increased to $0.563 million as the prior-year comparison included only a partial period after the notes’ issuance. Interest income increased to $0.467 million, reflecting higher rates and cash balances.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management’s strategy is to pursue acquisitions and organic growth through asset retention and fund inflows. It cited potential economic weakness and recession, market fluctuations, investor redemptions, interest rates, inflation, competition, regulation, and additional compliance costs as factors that could affect results. Management emphasized fund performance and investor service as priorities.
Contractual expense-ratio limits require fee waivers for the Midstream Fund, Technology Fund, and Stance ETF; fees waived were $0.03 million in each of the current and prior-year quarters. The filing reports no other significant contingencies with original terms over one year. Management found no impairment of management-contract assets in its quarter-end qualitative assessment. Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether AUM and net flows stabilize, particularly given higher redemptions and the concentration of outflows in the Focus and Gas Utility funds.
- Whether advisory revenue and margins recover as AUM changes, and how much expense flexibility exists if revenues remain lower.
- Cash generation and dividend coverage, since operating cash flow was slightly negative this quarter despite substantial cash balances.
- Debt service and refinancing or redemption plans for the 4.875% notes, including the timing and cost of any optional redemption.
- Stance ETF asset growth, the economics of its unitary advisory fee, and the ongoing expense-ratio waivers and their expiration dates.