FRANKLIN RESOURCES INC (BEN)·Q1 2025 Earnings Summary

Executive Summary

• Q1 FY2025 GAAP results improved sequentially as Western impairment rolled off: Operating revenues rose 2% q/q to $2.252B; operating income recovered to $219M (from a $(151)M) loss in Q4), and diluted EPS was $0.29 vs $(0.19) in Q4; y/y, EPS fell from $0.50 given higher expenses and non-operating items .
• Non‑GAAP held steady: Adjusted EPS was $0.59 (flat q/q); adjusted operating income declined 9% q/q to $412.8M and adjusted operating margin compressed to 24.5% from 26.3% on Western‑related impacts and seasonal compensation .
• Flows bifurcated: Long‑term net outflows were $50B, driven by $67.9B at Western Asset; excluding Western, long‑term net inflows were ~$18B and positive in every asset class; AUM ended at $1.576T (‑6% q/q, +8% y/y) on markets (‑$52.9B) and outflows .
• Expense/margin roadmap: Management targets $200–$250M in run‑rate expense reductions by the start of FY2026 with medium‑term adjusted operating margin target of 30% unchanged; near‑term quarterly guidance: EFR mid‑to‑high 37 bps, C&B $815–$820M, IS&T ~$150M, occupancy $70–$75M, G&A ~$190M, tax 25–27% .
• Subsequent update: January 31 AUM was $1.583T; Western long‑term outflows were ~$17B in Jan while ex‑Western long‑term inflows were ~$4B, with positive markets offsetting net flows .

What Went Well and What Went Wrong

• What Went Well
  • Ex‑Western inflows turned positive across every asset class (~$18B), with combined positive net flows of ~$17B in equities, multi‑asset and alternatives; ETFs delivered their 13th straight positive quarter ($2.7B), Canvas had record $0.9B net flows, and alternatives raised $6B ($4.3B private markets) .
  • Adjusted EPS held at $0.59 despite Western headwinds, aided by FX gains and lower tax rate; adjusted performance fees were $72.5M vs $72.0M in Q4 .
  • Strategic progress: Launched Franklin Lexington Private Markets evergreen fund for wealth ($900M initial cap), institutional pipeline increased to $18.1B, and Putnam continues to outperform with strong net flows and accretion above initial targets .
• What Went Wrong
  • Western Asset experienced $67.9B long‑term net outflows in the quarter (and ~$17B preliminarily in January), driving consolidated long‑term outflows of $50B and AUM decline; fixed income AUM fell 16% q/q .
  • GAAP net income fell 35% y/y to $163.6M and operating margin compressed to 9.7% (from 10.4% y/y), reflecting higher expenses and lower non‑operating income y/y; adjusted operating margin declined to 24.5% (from 27.3% y/y) .
  • Guidance implies near‑term margin pressure from Western integration and legal costs: G&A elevated (~$190M) due to advertising and Western matter; management expects FY2025 adjusted expenses “roughly flat” versus FY2024, with margin expansion deferred to FY2026 as savings phase in .

Financial Results

Revenue composition (GAAP)

AUM and flows KPIs

Current period (Q1 FY2025) additional KPIs

• Western long‑term net outflows: $67.9B (quarter) .
• ETF net flows: $2.7B (13th consecutive positive quarter); 9 ETFs >$1B AUM .
• Alternatives fundraising: $6.0B; private markets $4.3B (of which $1.6B non‑fee‑generating until Q2 or later) .
• Canvas custom indexing: $0.9B net flows; AUM $10.5B (+10% q/q) .
• Institutional pipeline (won‑but‑unfunded): $18.1B (+$2.3B q/q) .

Non‑GAAP adjustments (Q1 FY2025 highlights)

• Key addbacks to derive adjusted metrics included amortization of intangibles ($112.6M), acquisition‑related retention ($45.8M), other acquisition expenses ($12.7M), special termination benefits, and unrealized investment losses; sales & distribution fees and pass‑through performance fees were excluded from adjusted revenues .

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• “Excluding Western Asset Management, our long‑term net inflows were approximately $18 billion and positive in every asset class.” — Jenny Johnson, CEO .
• “We expect our expense initiatives that we’re working on now in 2025 to position us to enter fiscal ’26 with the equivalent of about $200 million to $250 million of run‑rate expense reductions… margin expansion again in fiscal 2026… medium‑term target of 30% remains exactly the same.” — Matthew Nicholls, CFO/COO .
• “Our ETF business saw its 13th consecutive quarter of positive net flows, attracting $2.7 billion during Q1… Nine of our ETFs now are over $1 billion in AUM.” — Jenny Johnson .
• “In January, we launched our first evergreen secondaries private equity fund… achieved an initial fundraising cap of $900 million in AUM.” — Jenny Johnson .
• “At quarter end, our institutional pipeline… increased by $2.3 billion to $18.1 billion… diversified across asset classes and specialist investment managers.” — Jenny Johnson .

Q&A Highlights

• Western trajectory and economics: Western outflows since August equate to ~30% of Western FY24 adjusted revenue (≈3% of Franklin’s), with remaining run‑rate ~6% of Franklin’s adjusted revenue; integration of select corporate functions to capture scale; margin pressure near‑term; expense saves ramping into FY2026 .
• Expense outlook cadence: FY2025 adjusted expenses roughly flat versus FY2024 (ex performance fees/full‑year Putnam); $200–$250M lower by end of FY2026 on a run‑rate basis; quarterly guidance updated for EFR and opex lines .
• Putnam integration: Accretion tracking ahead of plan ($175–$180M run‑rate operating income vs $150M target); strong flows ($12–$15B since close), improved distribution leverage with Empower/Power group .
• Alternatives in wealth: Three ~$1B perpetual evergreen funds across secondaries, real estate debt and real estate income; wealth channel expected to grow to 20–30% of alt capital raises over time .

Estimates Context

• S&P Global consensus (EPS, revenue, EBITDA) for Q1 FY2025 was unavailable at the time of analysis due to request limit constraints; as a result, we cannot quantify beats/misses vs consensus. Management guided near‑term EFR to the mid‑to‑high 37 bps range and outlined FY2026 margin expansion on planned savings, which may influence forward estimate revisions for margins and operating income .

Key Takeaways for Investors

• Ex‑Western franchise is healthy with broad‑based inflows across equities, multi‑asset, and alternatives; ETFs and Canvas continue to scale, supporting EFR stability despite mix shifts .
• Western remains the critical overhang; integration of select functions and visibility on monthly Western AUM/outflows are near‑term stock catalysts; January showed ~$17B Western long‑term outflows and ex‑Western +$4B inflows .
• Expense discipline is credible with a defined path to $200–$250M run‑rate savings by FY2026 and a reiterated 30% medium‑term adjusted margin target; expect FY2025 margins to trough before expanding in FY2026 .
• Alternatives fundraising and wealth democratization (evergreen secondaries, real estate debt) provide multi‑year high‑fee growth vectors; FY2025 alt fundraising target $13–$20B reiterated .
• Dividend kept at $0.32/share (+3.2% y/y), underscoring commitment to capital return while balancing debt maturities and strategic investments .
• Watch quarterly guidance markers: EFR trajectory, G&A elevation tied to Western, and progress on IS&T/occupancy normalization as New York double‑rent rolls off .

Appendix: Additional Subsequent Items

• January 31 AUM: $1.583T (vs $1.576T at Dec 31), reflecting positive markets and preliminary long‑term net outflows of $13B including $17B at Western; ex‑Western long‑term net inflows ~$4B .
• Dividend: $0.32/share payable April 11, 2025; +3.2% y/y; unchanged q/q .
• Western ETF reorganization: Proposed WBND into WABF reorganization discontinued after shareholder vote outcome; Board may consider other actions .

Notes: All figures are fiscal Q1 2025 (quarter ended Dec 31, 2024) unless stated. Non‑GAAP definitions and reconciliations provided by the company .