Business context and reporting period
Franklin Resources, Inc. (operating under the Franklin Templeton and other brands) filed this unaudited Form 10-Q for its fiscal third quarter ended June 30, 2023, and the nine months then ended. The company is a global investment manager whose revenues depend substantially on assets under management (AUM), asset mix, market performance, and fee rates.
Financial and operating performance
| Metric | Three months ended June 30, 2023 | Nine months ended June 30, 2023 |
|---|---|---|
| Operating revenue | $1.969 billion, down 3% year over year | $5.863 billion, down 7% |
| Operating income / margin | $314.9 million / 16.0%; prior-year margin 19.9% | $764.0 million / 13.0%; prior-year margin 22.5% |
| Net income attributable to Franklin Resources | $227.5 million, down 11% | $587.3 million, down 45% |
| Diluted EPS | $0.44, versus $0.50 | $1.14, versus $2.07 |
| Adjusted operating income / margin | $476.8 million / 30.5% | $1.312 billion / 29.0% |
| Adjusted net income / diluted EPS | $326.1 million / $0.63 | $905.2 million / $1.76 |
Adjusted figures are non-GAAP measures; the company’s reconciliation excludes specified acquisition-related costs, intangible amortization, special termination benefits, and other items. Adjusted operating margin was also lower year over year (35.3% and 37.0%, respectively).
For the quarter, investment management fees declined 1%, sales and distribution fees 9%, and shareholder servicing fees 17%. For the nine-month period, those categories declined 5%, 19%, and 21%, respectively. Lower average AUM and lower sales-based fees weighed on revenue; performance fees increased, including fees from Lexington that were passed through as compensation expense.
Ending AUM was $1.432 trillion, up 4% from June 30, 2022 and 10% from September 30, 2022. Average AUM declined 1% for the quarter and 7% for the nine-month period year over year. Quarterly long-term net flows were approximately neutral (+$0.2 billion), while cash-management outflows were $7.3 billion. Nine-month long-term net outflows were $14.4 billion. Alternative AUM grew, while fixed-income and equity average AUM declined year over year.
Nine-month operating cash flow was $365.3 million, versus $1.090 billion in the prior-year period. Investing cash outflow was $3.251 billion and financing cash inflow was $2.425 billion; these consolidated totals reflect investment-product activity, including CLOs. Excluding third-party consolidated investment products, liquid assets were $5.902 billion at June 30, 2023, versus $6.048 billion at September 30, 2022. Corporate debt was $3.359 billion, compared with $3.376 billion. Separately, consolidated investment products had $7.989 billion of debt, which the company says is nonrecourse beyond its direct investments.
Material changes and notable items
- Lower average AUM and reduced distribution and shareholder-servicing fees contributed to weaker revenue. Nine-month GAAP operating income fell 46%, while adjusted operating income fell 28%.
- The company acquired BNY Alcentra in November 2022. Alcentra contributed $116.7 million of revenue in the nine months ended June 30, 2023; its impact on attributable net income was not material. Purchase consideration included cash, deferred consideration, and contingent payments of up to $350 million.
- Higher investment and other income helped offset operating weakness: nine-month investment and other income, net, was $267.9 million versus $97.7 million. The current period included investment gains and higher dividend and interest income; results also included equity-method investment income, partly offset by foreign-exchange losses.
- Compensation and benefits expense rose 15% over nine months, including acquisition-related costs and performance-fee pass-throughs. Intangible amortization increased 27%, largely reflecting acquisitions.
- On May 31, 2023, Franklin agreed to acquire Putnam Investments for 33.3 million Franklin shares and $100 million cash payable 180 days after closing. The filing describes an agreement, not a completed acquisition.
- On July 25, 2023, the company replaced its prior credit arrangements with an $800 million five-year revolving facility; it had no borrowings under the new facility as of the filing. The prior $300 million term loan was repaid with cash.
Outlook, risks and contingencies
The filing provides no specific financial guidance. Management described continued uncertainty in economic and regulatory conditions and said it remains focused on investment performance, client service, expense management, talent, and strategic technology investment. It expects approximately $70 million of additional acquisition-related retention expense in the remainder of fiscal 2023, followed by approximately $240 million in fiscal 2024, with amounts expected to decline in the following two years.
Management identified risks including market volatility and declines in AUM, fee pressure, investment performance, competition, regulatory change, geopolitical events, currency and interest-rate movements, and operational, technology, and security risks. It cautioned that forward-looking statements are subject to uncertainty. The company reported no material change in market-risk disclosures from its fiscal 2022 Form 10-K.
The India Credit Fund closure matters had no significant update; approximately INR 27,109.3 crore (about $3.3 billion) had been reported distributed to fund unitholders. Management believes other ordinary-course litigation will not materially affect the company and reported no material probable or reasonably possible loss under indemnifications or guarantees. The filing also notes a 16-year New York office lease commitment with expected aggregate payments of $766.7 million.
Important facts for investors to verify
- Whether average AUM, net flows, and fee rates improve, particularly in fixed income and equity, and how that affects recurring revenue.
- How much of reported and adjusted earnings depends on performance fees, investment gains, acquisition-related adjustments, and other nonrecurring items.
- Integration and retention costs for Alcentra, and the closing status, share issuance, funding, and expected effects of the Putnam transaction.
- Cash generation and liquidity excluding consolidated investment products, alongside corporate debt service, dividends, repurchases, and acquisition commitments.
- The scale and risk of CLO and other consolidated-product balances, while distinguishing their nonrecourse debt and assets from Franklin’s corporate obligations.
- Developments in the India fund matters, litigation, and the New York lease commitment.