Franklin Resources, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2023. The registrant is Franklin Resources, Inc., operating under the Franklin Templeton and other brands. Comparisons are with the quarter ended December 31, 2022, unless otherwise noted. Amounts are in U.S. dollars.
Financial and operating performance
| Metric | Q1 FY2024 | Prior-year quarter | Change |
|---|---|---|---|
| Operating revenue | $1,991.1 million | $1,967.1 million | +1% |
| Operating income | $206.5 million | $194.0 million | +6% |
| Operating margin | 10.4% | 9.9% | +0.5 percentage points |
| Net income attributable to Franklin Resources | $251.3 million | $165.6 million | +52% |
| Diluted EPS | $0.50 | $0.32 | +56% |
| Adjusted operating income (non-GAAP) | $417.0 million | $395.1 million | +6% |
| Adjusted operating margin (non-GAAP) | 27.3% | 27.5% | -0.2 percentage points |
| Adjusted net income / diluted EPS (non-GAAP) | $328.5 million / $0.65 | $262.4 million / $0.51 | +25% / +27% |
Revenue growth reflected higher average AUM and catch-up fees, partly offset by lower performance fees. GAAP net income growth substantially exceeded revenue and operating-income growth, reflecting higher investment and other income and lower interest expense; results also included investment gains and a lower effective tax rate. The effective tax rate was 22.6%, versus 26.3%.
Total operating expenses rose 1% to $1,784.6 million. Compensation expense declined 1% as lower acquisition-related performance-fee pass-through costs offset higher incentive compensation and other items. Occupancy expense increased 22%, primarily with the new New York office lease, while information systems and technology expense rose 8%.
Cash flow: Operating cash flow was negative $251.9 million, compared with negative $256.3 million. Investing cash flow was negative $137.6 million, versus negative $1,042.6 million, which included prior-year acquisition spending. Financing cash flow was negative $159.0 million, compared with positive $958.9 million in the prior-year quarter. Consolidated cash and cash equivalents declined $522.8 million during the quarter to $3,879.6 million, including cash held by consolidated investment products.
Liquidity and debt: Excluding third-party assets of consolidated investment products, the company reported $5,591.1 million of liquid assets at December 31, 2023, including $3,284.6 million of cash and cash equivalents, and $3,046.9 million of company debt. Its $800 million revolving credit facility was undrawn, and the company reported compliance with debt covenants. Debt of consolidated investment products was $7,839.6 million; the filing says holders have no recourse to the company beyond its direct investment in those products.
AUM and material changes
- AUM ended the quarter at $1,455.5 billion, up 6% from September 30, 2023 and 5% from December 31, 2022. Average AUM rose 3% year over year to $1,394.2 billion.
- Quarterly total net flows were negative $0.3 billion: $5.0 billion of long-term net outflows were largely offset by $4.7 billion of cash-management inflows. Positive market change, distributions and other added $81.6 billion, including $94.3 billion of market appreciation.
- Equity AUM grew 12% year over year and multi-asset AUM 9%; cash-management AUM declined 13%. Long-term outflows eased to $73.9 billion from $81.4 billion.
- Investment management fees increased 1%; performance fees fell to $166.4 million from $209.0 million, primarily due to lower Lexington performance fees passed through as compensation expense.
- Quarterly dividends declared were $0.31 per share, versus $0.30. The company repurchased 2.4 million shares for $58.8 million. At December 31, 39.5 million shares remained available under its repurchase authorization.
Outlook, significant items and risks
- The company provided no specific revenue or earnings guidance in the supplied filing. Management cited uncertain economic and regulatory conditions and emphasized investment performance, client service, expense management, talent and technology investment.
- Putnam Investments was acquired on January 1, 2024, after quarter-end, for 31.6 million Franklin shares, approximately $220 million of cash at closing and $100 million of deferred cash consideration due in Q3 FY2024. Up to $375 million of additional payments may be due from the third through seventh anniversaries, linked to revenue-growth targets under a strategic partnership.
- Management expects approximately $250 million of additional acquisition-related retention expense during the rest of FY2024; it also outlined expected annual amounts beginning at approximately $190 million in FY2025 and declining thereafter.
- The company recognized a $396.6 million operating lease asset and liability when it took possession of One Madison Avenue. The lease is over 16 years, with aggregate expected commitments of $707.3 million.
- Further deferred cash payments related to the Lexington acquisition of $400 million in Q3 FY2024 and $100 million in FY2025 are expected. The filing also reports a $60.8 million Alcentra deferred-consideration payment during the quarter.
- Risks include market and AUM volatility, investment performance and reputation, competition and distribution, technology and security, global operations, and legal and regulatory matters. The filing reported no material change in risk factors or market-risk disclosures and no material change in internal control over financial reporting.
- Management stated that other litigation is not expected to materially affect the company and that adequate accruals have been made for estimable probable losses. No material loss was considered probable or reasonably possible under indemnifications and guarantees. The India Credit Fund closure matters had no significant quarterly update.
Important facts for investors to verify
- Whether AUM growth and improved market conditions translate into sustained long-term net inflows and recurring fee revenue.
- How much reported earnings growth came from recurring operations versus investment gains, tax-reserve releases, stock-based compensation tax benefits and other non-recurring factors; compare GAAP results with the company’s non-GAAP reconciliations.
- The integration, costs and expected contribution of Putnam, including share dilution and contingent payments tied to revenue targets.
- Cash generation and liquidity after acquisition-related payments, dividends, repurchases and investments; distinguish company resources from cash and debt of consolidated investment products.
- The effect of the New York lease and scheduled acquisition-related retention and deferred-consideration costs on future expenses and capital allocation.