Victory Capital Holdings Inc. Q1 2023 Earnings Call
Good morning, and welcome to the victory capital first quarter 2023 earnings Conference call. All callers are in a listen only mode. Following the company's prepared remarks, there will be a question and answer session. I will now turn the call over to Mr. Matthew Dennis Chief of staff and director of Investor Relations.
Please go ahead Mr. Dennis.
Before I turn the call over to David Brown, I would like to remind you that during today's conference call. We may make a number of forward looking statements. Please note that victory capital actual results may differ materially from these statements. Please refer to our SEC filings for a list of some of the risk factors that may cause actual results to differ.
Really from those expressed on today's call victory capital assumes no duty and does not undertake any obligation to update any forward looking statements.
Our press release that was issued after the market closed yesterday disclose both GAAP.
And non-GAAP financial results, we believe the non-GAAP measures enhance the understanding of our business and our performance reconciliations between these non-GAAP measures and the most comparable GAAP measures are included in tables that can be found in our earnings press release and in the slide presentation accompanying this call both of them.
Which are available on the Investor relations portion of our website at IR Dot ECM Dotcom. It's now my pleasure to turn the call over to David Brown, Chairman and CEO David Thanks.
Thanks, Matt Good morning, and welcome to victory Capital's first quarter 2023 earnings Conference call.
Joined today by Michael Pehl of cargo, our President Chief financial and administrative officer, as well as Matt Dennis our chief of staff and director of Investor Relations.
I'll start today by providing an overview of the first quarter.
After that I will turn the call over to Mike to review the financial results in detail.
Following our prepared remarks, Mike, Matt and I will be available to take your questions.
The quarterly business overview begins on slide five.
We generated strong financial results to start out to 2023 year.
Average AUM increased for the first time in three quarters as the markets rebounded modestly and we achieved significant improvement in long term net flows compared with the prior quarter.
The improving net flow trajectory has also continued to entering the second quarter.
April we had many institutional redemption from a single client or a total of approximately $1 1 billion.
You will see the impact of this in our April <unk>, which is scheduled for next week.
This specific redemption was investigated purely passive strategy managed by our solutions team with a fee of less than three basis points and it was consequently, not making any measurable margin contribution absent. This redemption, we have achieved relatively flat net long term flows thus far in the second quarter as of today.
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Our margin stayed strong coming in at 49, 3% this quarter, which is industry, leading and demonstrates the defensibility of our margins in this challenging market environment.
Our margin durability as a result of our differentiated operating platform combined with a determined daily execution by our team.
Adjusted net income with tax benefit rose to $1 eight per diluted share in the quarter up from $1 <unk> per diluted share in the previous quarter.
Return of capital to shareholders continues to be robust to start the year.
We repurchased more be ctr shares this quarter versus last quarter.
$44 million on the share repurchases and paid out $22 million in cash dividends for a total capital return of approximately $66 million in the quarter.
As a reminder, in the first quarter the board increased the cash dividend by 20%, which was maintained in the current quarter.
Our long term margin guidance remains unchanged at 49%.
Our guidance takes into account ongoing strategic investments in our business, which we continue to make.
A good example of this is last month, we launched victory capital invest which is our new marketplace brokerage platform.
This is an open architecture brokerage platform, which provides significantly more product choice and flexibility to existing and new direct investor clients.
We are also continuing to make strategic investments in other areas of the business aimed at better harnessing data and enhancing our technology capabilities.
Adding distribution and marketing resources.
Turning to hire new talent.
All of these investments will help us grow our business in the future and all the associated costs are in our current operating margins and our guidance going forward.
Turning to slide seven the excellent investment performance, we deliver on behalf of our clients was sustained during the first quarter.
At quarter end 44 of our mutual funds and Etfs had four or five star overall ratings from Morningstar.
These products with four or five stars account for two thirds of our assets under management in mutual funds and Etfs.
Additionally, approximately three quarters of our total assets under management outperformed benchmarks for the three five and 10 year measurement periods as of March 31.
During the quarter.
Several of our mutual funds moved into the top quartile relative to their peer group According to Morningstar.
These included our victory income fund as well as the victory tax exempt short term bond fund.
In total 95% of fund assets under management managed by victory income investors. This is the rebranded former USAA investments franchise is diversified across 14 funds that have earned current overall ratings of four or five stars.
Net flows into these products improved significantly in the first quarter.
With excellent investment performance, coupled with what we believe to be a better flow environment emerging for fixed income as we move through this year and into 2024.
The opportunity for growth here is quite exciting.
Across all asset classes.
Half of our mutual fund and ETF assets under management ranked in the top quartile for the trailing 12 month period.
Over the five and 10 year periods, 65% of our fund assets under management ranks top quartile with more than 20% ranked in the top decile.
This excellent investment performance highlights another advantage of our differentiated operating model.
Which removes all non core investment activities at the investment franchise level.
We're leaving our investment professionals are these.
We enable them to spend the majority of their time managing client assets.
We believe this enhances investment performance over longer periods of time.
Turning to slide eight cash flow generation remained strong to start the year, we remain opportunistic with our share repurchase activity again this quarter, given the overall market and specifically our share price.
We believe there is a significant amount of value that is not currently reflected in our current share price.
With that in mind, we chose not to pay down any additional debt in the quarter and plan to remain flexible and nimble with our capital allocation strategy as we move through 2023.
We are also continuing to conduct diligence on multiple acquisition opportunities.
It is important to state that we are not deviating from our proven approach to make our company better through acquisitions.
We remain patient and selective as we evaluate opportunities that enhance shareholder value over the long term.
With that I will turn it over to Mike for more details on the quarter's financials Mike.
Thanks, Dave and good morning, everyone. The financial results review begins on slide 10.
Assets under management increased three 7% from $153 billion at the beginning of the year to $158 6 billion at quarter end.
Revenue of $201 3 million was essentially flat in the first quarter compared with the $201 $5 million of revenue recorded in the fourth quarter of 2022.
While average AUM in the quarter was up 2% from the fourth quarter and quarter over quarter fee rate was flat there are fewer days in the first quarter compared with the fourth quarter period.
GAAP operating income was $74 6 million.
And our adjusted EBITDA was 99 2 million.
Net income was $49 3 million.
So 71 per diluted share on a GAAP basis, and adjusted net income with tax benefit rose to $75 2 million.
Our $1 eight per diluted share.
We returned $66 million of capital to shareholders in the first quarter, which was ahead of last year's quarterly average.
Lastly, we increased our quarterly dividend last quarter to 32 per share and.
And at the same rate was declared again by our board for the second quarter.
That cash dividend will be payable on June 26th to shareholders of record on June 12.
On Slide 11, you can see total AUM of $158 6 billion at the end of the quarter remained well diversified from a distribution channel and client perspective.
This diversification is deliberate and designed to mitigate volatility from any particular segment of clients.
Turning to slide 12 bounced up gross flows for $5 8 billion in the quarter.
This reflects soft industry wide sales as investors have been hesitant and so the market given heightened volatility uncertainty and holding cash has become a reasonable investment alternative most asset classes and the current interest rate and risk environment.
Our global purpose and Sycamore each had positive net flows for the first quarter.
And we achieved positive net long term flows.
Active domestic equity products.
With particular strength in our U S mid.
And the small cap strategy.
Slide 13 illustrates our revenue by quarter.
While estimates on the slide is that our fee rate held steady at $51 seven basis points in the first quarter.
Which is consistent with the fourth quarter of last year.
Moving forward, our consolidated fee rate will be primarily influenced by asset client and vehicle mix.
We see general fee rate setting for our business.
On slide 14, we breakout our expenses for the quarter.
GAAP operating expenses increased 4% or by $4 9 million to $126 8 million.
This was entirely due to higher noncash expenses associated with the change in value of consideration payable for prior acquisitions.
With rose by $7 4 million quarter over quarter.
Partially offsetting this noncash increase for lower total compensation expenses, despite the seasonally higher employment taxes and benefits that reset in the first quarter.
Flat distribution and other asset based expenses.
As well as lower G&A expenses.
Cash compensation expense was in line with expectations and as you can see from this graph as a percentage of revenue cash comp remains in a very tight range, reflecting the calibrating nature of the investment franchise revenue share component of our operating platform.
It should be noted that Q1 includes the annual reset of certain employment taxes and benefits that accounted for the quarter over quarter increase in cash compensation as a percentage of revenue.
Moving on to our non-GAAP results on slide 15.
Adjusted net income rose to $55 $6 million in the first quarter.
The tax benefit in the quarter held steady at $9 5 million.
Our eni tax benefit of $75 2 million.
But $1 eight per diluted share.
Our adjusted EBITDA margin remained strong at 49, 3% in the quarter.
We are maintaining our long term margin guidance of 49% for 2023, which is inclusive of our continued investments.
Areas to support future growth.
Finally, turning to slide 16, our net leverage ratio remained at two four times as we did not pay down any debt in the first quarter.
The average interest rate on our debt rose 53 basis points to 524% in the quarter, which resulted in our interest and other financing expense increased $900000 from the fourth quarter.
This does factor in the $450 million hedge portion of our debt, which is fixed at three 5%.
Our $100 million revolver remains undrawn.
And GAAP operating cash flow from operations was $54 2 million in the first quarter.
That concludes our prepared remarks, I will now turn it back over to the operator for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question comes from the line of Kenneth Lee from RBC Capital markets. Your line is open.
Hi, good morning, and thanks for taking my question.
Just one on the positive net flows you are seeing in the U S mid cap small cap areas.
Wondering if there was anything to call out there what are you seeing in terms of client trends there. Thanks.
Thanks for the question Ken Good morning.
As far as that asset class, we're seeing strength with a few of our franchises Sycamore and <unk>.
Some others and then specifically in the institutional channel is where we've seen.
Some nice pickup.
Got you very helpful. There.
And then in terms of priorities for free cash flow you talked about being more nimble this year.
It sounds like Youre prioritizing share repurchase a little bit more now and there is also a new authorization just wondering how active could you be in terms of share repurchases potentially this year. Thanks.
Good question.
First I would say is our overall strategy around capital allocation has not changed our first.
Highest priority is to make sure we have a flexible balance sheet to.
To do acquisitions with that in mind.
Ancillary part of it whether we pay down debt or whether we buy shares really is around the current facts and circumstances. So the last two quarters, we have purchased a lot of shares and.
But would remind you in 2022, we did pay down a $150 million of debt, which was still a sizeable portion of our cash flow as we look forward as we said in our prepared remarks, we're going to be nimble and opportunistic we do think that our stock today has a lot of value that isn't reflected in the share price.
And then we also feel like we have a good portion of our debt is hedged.
So we will look at the current circumstances I wouldn't necessarily take what we've done this quarter or last quarter from a share repurchase and roll. It forward, we could buy more shares we can buy less shares we're really going to take it as the market and as the opportunities evolve.
Got you very helpful. There. Thanks again.
Your next question comes from the line of Mike Brown from <unk>. Your line is open.
Hey, great. Thanks, operator.
So Steve clearly a lot of money in motion right now and I just wanted to dig into some of your flow trends here.
And you touched on fixed income in your in your prepared remarks. So this past quarter. We saw that you had net outflows and I noticed that your money markets, which is big.
A big of a business year, but also had some outflows and some <unk>.
And from what we're seeing in the industry trend. So can you just touch on why the money market saw some net outflows and then specifically on the fixed income side and let's take the gross sales haven't really picked up and redemptions are still.
Running at a little bit on the higher pace. There. So what do you think really causes those trends to improve as we progress through the year.
Good morning.
Thanks for the question specifically on the money markets are money market has offered really in our captive channel and our direct business. So we have not participated in some of the inflows for the industry because it is not readily available outside of our direct channel. So I would say from there it's really an accommodation for.
Those direct investors.
Some have broad.
To us from from some of the banks, but many don't really utilize our money market in ways that other money markets were utilized in the industry. So that's a little bit of a unique situation to us as far as the fixed income side. We have spent the last few years really building the distribution pipes.
With our team victory income investors.
We have seen quite a pick up in our net flows from where we were we're not at the point now where that has really turned the corner, we think going forward with the distribution pipes being having been built and then new ones also being built and then also what's.
Opening in the market, we think as we look forward that will that trajectory will change they've got excellent investment performance, which we highlighted in our script.
Long term track record the sizable amount of assets and we think we're going to participate in the future with the team.
Okay, great. Thanks for the thoughts there.
Just to change gears.
It looks like you guys are launching a you announce that you're launching a digital investing platform. Later this year can you just expand on that offering and how you expect to really stand out in a crowded field.
If I heard you right. It sounds like there isn't really any incremental investment it sounds like the investment there is already baked into the expense base did I hear that correct should we expect.
Maybe a little bit of incremental marketing expense to come through later this year.
Let me take the last part of the question first our guidance going forward at 49% factors in EMEA investment, we're making and have made.
So it isn't that we're not making the investment it is that the 49% is net of the investment.
And I think that just gives you the power of our platform and the way we're structured so we will be investing but it is in our guidance going forward as.
As far as our direct business, which is where we're expanding the products that we launched.
At the end of last month, we launched a new platform really an open architecture brokerage platform.
Victory capital invest.
We call this what we branded it and that.
That platform will continue to expand products there were centering around a few different points around service around product choice.
And it's really today will be an expansion of product choice for our existing clients and we're just beginning to go out and marketing.
We expect longer term that this will be a growing part of our business and we're pretty excited to really make that next step in evolution in this product offering down the road, we will have the digital investing platform equivalent of what you would call a robo.
And that's something that we're going to we're going to go out and market and.
What kind of progress we can make there.
Okay very exciting thanks for sharing those options.
Your next question comes from the line of Ken Worthington from Jpmorgan. Your line is open.
Hey, good morning in Nytimes is Michael Chou actually include Ken I, just wanted to just touch on that tomorrow again.
You mentioned.
The positive flows into <unk> and I think you'd called out you're just continuing to see strength. There I guess is just one.
Big of a driver where those flows into sycamore.
And then two if I recall, the sycamore had been somewhat capacity constrained.
For some time, but it continues to be a strong driver of that.
So at some point they have to.
Close the fund's investment or can you continue.
At this pace and definitely thanks.
It was an input to our flows I wouldn't say it was significant or material is one that we called out.
And so I wouldn't we don't break it out franchise by franchise, but but I wouldn't call it material or significant as far as sycamore. It is closed to new investors. It is on platforms and then selectively with existing clients, we are accepting new dollars, but but effectively.
Today. It is it has closed primarily to new investments new investors and platforms.
Okay understood. Thank you and then just change gears just quickly.
Talked about that.
To invest in marketplace and kind of expansion of <unk>.
Product choices.
Just curious kind of where youre headed in terms of.
The types of products.
Tenants looking to rollout first.
And kind of the cadence of that going forward as well once the with the new platform.
So the new platform today.
Offers almost all offers all of the victories products and then in addition to that.
<unk> almost all third party Etfs and mutual funds and then the ability to trade stocks as well Commission free.
So if you think about it very much looks like an open architecture brokerage platform. So you could buy the victory shares ETF sugared by any victory mutual funds you can buy it for the most part any third party.
Mutual funds or any third party Etfs, and then the ability to buy and sell stocks.
Okay.
Okay. Thank you.
And there are no further questions at this time, Mr. David Brown, I will turn the call back over to you for some final closing remarks.
Thank you and thank you for your interest in victory capital. Later this month, we will be attending the 20 <unk> annual B Riley institutional Investor Conference in Los Angeles, and we hope to see some of you there.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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