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BrightSphere Investment Group Inc. (BSIG)·Q4 2023 Earnings Summary

Executive Summary

  • Record non-GAAP ENI EPS of $0.77, up 15% YoY and 71% QoQ; GAAP diluted EPS of $0.54 declined 25% YoY as operating expenses rose, while total revenue grew 6.9% YoY to $131.2M on higher average AUM and seasonally strong performance fees .
  • AUM ended at $103.7B (+10.8% YoY, +6.5% QoQ), but net client cash flows were $(2.0)B for Q4, with a $(6.4)M annualized revenue headwind, primarily from outflows in managed volatility strategies; long-term performance remains strong (90%+ of strategies by revenue outperforming on 3/5/10-yr) .
  • Capital return: Board authorized up to $100M for repurchases in Dec-23; repurchased $5.1M in Dec and another $38.0M in Q1’24-to-date (total ~5.2% of shares); cash balance was ~$146.8–$147M at year-end; declared a $0.01 dividend payable Mar 28, 2024 .
  • Management expects near-term fee rate stability (~38 bps) and gave 2024 ratio outlooks: Operating Expense Ratio ~48–53%, Variable Compensation Ratio ~46–50%, and Affiliate Key Employee Distribution Ratio ~5–7%; continued pressure anticipated in managed volatility flows given a beta-rewarding market .

What Went Well and What Went Wrong

  • What Went Well

    • Record ENI EPS ($0.77) and strong QoQ profit lift on seasonally higher performance fees; Acadian Adjusted EBITDA rose to $55.2M (vs $37.7M in Q3) .
    • AUM rebounded to $103.7B on market appreciation; long-term investment performance strengthened further with 90%/90%/92% of strategies by revenue beating benchmarks over 3/5/10-year horizons .
    • Capital deployment accelerated: New $100M buyback authorization, ~$43M of repurchases through early Q1’24, and $147M year-end cash; management reiterated focus on buybacks and seeding growth (Systematic Credit seeded in Nov with $15M) .

  • What Went Wrong

    • Net outflows of $(2.0)B in Q4 (annualized revenue impact $(6.4)M), driven by managed volatility strategy outflows and year-end client reallocations; management expects continued pressure in managed volatility near term .
    • GAAP diluted EPS fell 25% YoY (to $0.54) and GAAP operating margin compressed to 27% (from 39%), with operating expenses up 27.8% YoY driven by variable compensation, severance, and equity plan liability changes .
    • Non-GAAP adjustments included $7.3M severance at Acadian and $0.9M legal restructuring costs, which contributed to the divergence between GAAP EPS and ENI EPS .

Financial Results

GAAP results

MetricQ4 2022Q3 2023Q4 2023
Revenue ($M)$122.7 $107.3 $131.2
Management Fees ($M)$86.0 $95.3 $94.5
Performance Fees ($M)$36.3 $11.2 $36.5
Net Income Attrib. to Controlling Interests ($M)$30.4 $19.6 $22.8
Diluted EPS ($)$0.72 $0.46 $0.54
GAAP Operating Margin (%)39% 28% 27%
Wall St. Consensus (Revenue, EPS)N/A (S&P Global consensus unavailable)N/A (S&P Global consensus unavailable)N/A (S&P Global consensus unavailable)

Non-GAAP and segment performance

MetricQ4 2022Q3 2023Q4 2023
ENI Revenue ($M)$122.3 $106.5 $131.0
ENI Diluted EPS ($)$0.67 $0.45 $0.77
ENI Operating Margin (%)36% 29% 36%
Pre-tax ENI ($M)$39.1 $26.4 $44.4
Segment ENI ($M) (Acadian)$47.3 $33.2 $50.6
Segment ENI Operating Margin (%)40.0% 32.6% 39.5%
Segment Adjusted EBITDA ($M)$50.9 $37.7 $55.2

Flows, AUM, and fee-rate KPIs

KPIQ4 2022Q3 2023Q4 2023
AUM End ($B)$93.6 $97.4 $103.7
Average AUM ($B)$89.3 $100.5 $98.6
Net Flows ($B)$1.3 $(0.5)$ $(2.0)$
Annualized Revenue Impact of Net Flows ($M)$3.2 $(0.3)$ $(6.4)$
ENI Mgmt Fee Rate (bps)38.137.638.0
Performance Fees ($M)$36.3 $11.2 $36.5

Cost ratios

MetricQ4 2022Q3 2023Q4 2023
Variable Compensation Ratio (%)40.2% 48.2% 39.0%
Operating Expense Ratio (% of MFs)55.7% 49.7% 55.8%

Liquidity and capital

MetricQ2 2023Q3 2023Q4 2023
Cash Balance ($M)$141 $143 $146.8
Net Leverage (x, LTM Adj. EBITDA)N/AN/A0.9x
Share Repurchases (activity)N/AN/A$5.1M in Dec; +$38.0M in Q1’24-to-date

Notes: S&P Global consensus estimates were unavailable for BSIG this quarter; therefore, beats/misses vs estimates cannot be shown.

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Operating Expense Ratio (% of MFs)FY 2024N/A~48%–53% (market-level dependent) New/Set
Variable Compensation RatioFY 2024N/A46%–50% New/Set
Affiliate Key Employee Distribution RatioFY 2024N/A5%–7% (mix-sensitive) New/Set
Fee Rate (Mgmt Fee bps)Next few quartersN/A~38 bps; higher over time if Equity Alts/Systematic Credit scale Commentary
DividendNext payableN/A$0.01/sh payable Mar 28, 2024; record Mar 15, 2024 Announced
Share RepurchasesAuthorizationN/AUp to $100M authorized Dec-23; $5.1M in Dec and $38.0M in Q1’24-to-date New/Active

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 2023, Q3 2023)Current Period (Q4 2023)Trend
Performance fees seasonalityQ2: typical Q4 seasonality; Q3 saw atypical performance fees from certain strategies with Q3 measuring periods Q4 performance fees rose to $36.5M (vs $11.2M in Q3) with seasonally strong Q4 Seasonal normalization to strong Q4
Managed volatility flowsQ2: modest inflows; pipeline healthy Q3: $(0.5)B) net outflows tied to managed vol reallocations Q4: $(2.0)B) net outflows, pressure persists in beta-rewarding market
Fee rate outlookQ2: ~38 bps near-term Q3: ~38 bps near-term Q4: ~38 bps near-term; mix could lift over time (Equity Alts, Systematic Credit)
Growth initiativesQ2: Equity Alts seeded in Q4’22; Systematic Credit planned Q4’23 Q3: Systematic Credit to be seeded in Nov; Equity Alts track record building Q4: Systematic Credit HY seeded ($15M); Equity Alts delivering outperformance, client interest building
Capital returnQ2: Buybacks paused; window constraints Q3: Window still closed; targeting ~$100M capacity Q4: New $100M authorization; ~$43M repurchased through early Q1’24
Balance sheet/leverageQ2: Revolver seasonal drawdown; paydown expected by YE Q3: Revolver $13M outstanding; expected to be paid by YE Q4: Revolver fully repaid; net leverage 0.9x

Management Commentary

  • “For the fourth quarter of 2023, the Company produced record ENI earnings per share of $0.77… The increase… compared to the third quarter of 2023 was driven by an increase in performance fee revenue, which is seasonally higher in the fourth quarter.”
  • “We reported net client cash flows of $(2.0) billion for the fourth quarter of 2023 driven by outflows from managed volatility strategies.”
  • “Systematic Credit… seeded its first strategy, U.S. High Yield, in November 2023 with $15 million… Equity Alternatives… continues to generate strong investment performance.”
  • “We… repurchased 268,800 shares for $5.1 million in December 2023 and… 1,872,028 shares for $38.0 million to date in Q1’24…”
  • “We had a cash balance of approximately $147 million as of December 31, 2023… Acadian fully paid down their revolving credit facility in the fourth quarter of 2023.”

Q&A Highlights

  • Capital allocation roadmap: ~$147M cash at YE; plan for ~$20–$25M seed in Q1’24, ~$20–$25M operating cash, leaving ~$100M for buybacks; ~$43M already used early in 2024; buybacks to be opportunistic .
  • Flows and pipeline: Outflows concentrated in managed volatility (low beta) given beta-rewarding market; pipeline healthy across ex-U.S. equities and small cap strategies, though conversions taking longer .
  • Initiatives update: Equity Alts has a client and strong track record; Systematic Credit (HY) seeded in Nov with promising early performance; client interest rising despite shorter track records .
  • Fee rate: Expect ~38 bps near-term; potential to drift higher as higher-fee Equity Alts and Systematic Credit scale; managed vol outflows (lower-fee) vs higher-fee inflows support mix over time .

Estimates Context

  • We attempted to retrieve S&P Global/Capital IQ consensus for Q4 2023 (revenue and EPS) but data were unavailable for BSIG at this time; therefore, beats/misses vs consensus cannot be shown. The analysis focuses on YoY and QoQ comparisons using company-reported results [SpgiEstimatesError: Missing CIQ mapping for ticker 'BSIG'].

Key Takeaways for Investors

  • Quality of earnings: Strong non-GAAP profitability (record ENI EPS) driven by seasonal performance fees; GAAP margins under pressure from variable comp and restructuring—important for valuation frameworks that blend GAAP and ENI .
  • Flows remain the top risk: Managed volatility outflows weighed on Q4 net flows, and management expects continued near-term pressure; monitor pipeline conversion pace in higher-fee strategies for offset .
  • Mix tailwind potential: Fee rate expected ~38 bps near term, with a pathway higher as Equity Alts/Systematic Credit scale and managed vol shrinks as a share of AUM .
  • Capital return is a catalyst: New $100M authorization and ~$43M executed through early Q1’24 (5.2% of shares) should support EPS and share count; tiny dividend maintained for flexibility .
  • Balance sheet strength: Net leverage at 0.9x and revolver fully repaid highlight ample capacity to fund seed and buybacks while navigating market volatility .
  • Watch performance fees into seasonally weak quarters: After a strong Q4, expect normalization of performance fees in Q1/Q2; revenue trajectory will hinge more on management fees/flows .
  • Execution on initiatives: Continued progress in Equity Alts and Systematic Credit broadens growth avenues; early client uptake could accelerate fee-rate mix and organic growth in 2024–2025 .

Appendix – Additional Data Points

  • U.S. GAAP revenue YoY +6.9% driven by higher average AUM; operating expenses +27.8% YoY on variable comp, severance, and equity-plan liability changes; GAAP operating margin 27% (vs 39% LY) .
  • ENI reconciliation highlights: Q4’23 included severance at Acadian ($7.3M) and legal restructuring at the Center ($0.9M), contributing to the gap between GAAP and ENI .
  • Investment performance breadth: 90%/90%/92% of strategies by revenue outperforming over 3/5/10-yr at 12/31/23; asset/equal-weighted metrics also improved vs Q3 .