Virtus Investment Partners - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 was resilient operationally despite lower average AUM and seasonal employment expenses: GAAP diluted EPS $4.05 and adjusted diluted EPS $5.73; GAAP revenue $217.9M; adjusted revenue $197.6M. Net flows improved to ($3.0)B from ($4.8)B in Q4, with ETFs posting strong positive net flows ($0.3B) and 73% organic growth YoY.
• Results beat Wall Street consensus on adjusted EPS (+$0.32*) and revenue (+$16.5M*) as reported by S&P Global; EPS estimates were based on normalized EPS [Q1 2025] with 4 EPS estimates and 1 revenue estimate*, signaling operational outperformance versus expectations. Values retrieved from S&P Global.*
• Management maintained modeling guardrails: average fee rate 41–42 bps, performance fees ~$3–5M/year, employment expenses 49–51% of adjusted revenues, and other OpEx $30–32M/quarter; noted ~$1M/quarter facilities savings starting Q3 2025.
• Capital returns remained active: $20.0M repurchases (111,200 shares) and $6.1M net share settlements; dividend held at $2.25/share; net debt $100.0M (0.3x EBITDA), supporting flexibility for buybacks, seed capital, and potential M&A.

What Went Well and What Went Wrong

What Went Well

• ETFs momentum and diversification: “ETF assets reached $3.4 billion on continued strong positive net flows of $0.3 billion. Over the past year, ETFs generated an organic growth rate of 73%.”
• Investment performance in volatile markets: “Over 70% of our equity strategies beat their benchmarks [in Q1]… 74% of equity assets beating benchmarks over the 10-year period.” Recognitions by Barron’s (#2 fund family for 10-year; third in taxable bond).
• Cost discipline and margin ex-seasonality: Adjusted operating margin was 27.6%, but excluding seasonal employment items, it was 32.7%, indicating underlying efficiency.

What Went Wrong

• Lower average AUM and seasonal payroll costs pressured margins: Adjusted revenues fell 7% QoQ (to $197.6M) and adjusted operating margin declined to 27.6% due to ~$10M seasonal employment expenses and lower investment management fees.
• Equity-driven retail fund outflows continued: Open-end net outflows (~$1.1B) “were essentially unchanged” QoQ, driven by equity, despite positive fixed income net flows.
• SMA net outflows on strategy capacity actions: Retail separate account net flows (-$0.7B) reflected the soft closing of SMID-Cap Core equity model offering and investor caution; however, mid-cap capacity remains ample.

Transcript

Operator (participant)

Good morning. My name is Dee Dee, and I will be your conference operator today. I would like to welcome everyone to the Virtus Investment Partners quarterly conference call. The slide presentation for this call is available in the Investor Relations section of the Virtus website, www.virtus.com. This call is being recorded and will be available for replay on the Virtus website. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question-and-answer period, and instructions will follow at that time. I will now turn the conference to your host, Sean Rourke.

Sean Rourke (VP of Investor Relations)

Thanks, Dee Dee, and good morning, everyone. On behalf of Virtus Investment Partners, I'd like to welcome you to the discussion of our operating and financial results for the first quarter of 2025. Our speakers today are George Aylward, President and CEO, and Mike Angerthal, Chief Financial Officer. Following their prepared remarks, we'll have a Q&A period. Before we begin, please note the disclosures on page two of the slide presentation. Certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and as such, are subject to known and unknown risks and uncertainties, including but not limited to those factors set forth in today's news release and discussed in our SEC filings. These risks and uncertainties may cause actual results to differ materially from those discussed in the statements. In addition to results presented on a GAAP basis, we assert non-GAAP measures to evaluate our financial results. Non-GAAP financial measures are not substitutes for GAAP financial results and should be read in conjunction with the GAAP results. Reconciliations of these non-GAAP financial measures to the applicable GAAP measures are included in today's news release and financial supplement, which are available on our website. Now, I'd like to turn the call over to George. George.

George Aylward (President and CEO)

Thank you, Sean, and good morning, everyone. I'll start today with an overview of the results we reported this morning and then give it over to Mike for more detail. Market performance volatility was challenging the first quarter, leading to lower assets under management. While we had net outflows, we continued to deliver solid financial and operating results. Key highlights included higher earnings per share over the prior year period, increased sales and fixed income strategies across products, positive net flows in ETFs, very strong relative investment performance, especially through the recent volatility, a higher level of share repurchases, and a solid balance sheet at quarter-end providing ongoing flexibility to invest in the business and return capital. The markets we've been experiencing, which continue in the second quarter with a heightened level of uncertainty and volatility, is a type of environment in which active managers can demonstrate their value. In our equity offering, several of our managers employ high conviction or high-quality orientations that seek to deliver strong investment performance and provide a level of downside protection in difficult markets. On the fixed income side, we offer multiple strategies across the spectrum of credit quality and duration, with products that are attractive in a variety of rate environments. We are pleased with the investment performance our managers have generated. In the first quarter, over 70% of our equity strategies beat their benchmarks, reflecting the benefit of quality active management in challenging markets. Our strategies have also consistently outperformed over market cycles, with 74% of equity assets meeting benchmarks over the 10-year period. We're pleased that our long-term performance was recognized again by Barron's, which identified us as the number two top fund family for the 10-year period. They also rank us as the third top fund family in the taxable bond category for 2024. In terms of product development, we remain very active in expanding offerings in our key focus areas, including ETFs, global funds, and retail separate accounts. For ETFs and global funds, we have several strategies under development and products in filing that we expect to launch over the next few quarters, including our first interval fund. For retail separate accounts, we completed structural steps to facilitate an increase in our fixed income offerings of retail separate accounts. We've also continued to expand the asset raising efforts of our $8.5 billion wealth management business and are expanding resources to support that effort. Turning now to a review of the results, total assets under management were $167.5 billion at March 31, down sequentially due to market performance and net outflows. Total sales were $6.2 billion, compared with $6.4 billion in the fourth quarter, and were generally stable across products despite the market disruption in March. Total net outflows of $3 billion improved from $4.8 billion as the prior quarter included a large partial redemption. Reviewing by product, for institutional, net outflows of $1.2 billion were primarily due to domestic and global large-cap equity strategies, partially offset by positive net flows in small and mid-cap equities, as well as emerging market debt. We continue to see interest in our institutional offerings from investors seeking differentiated active managers with strong investment performance, and there continues to be broad representation of sales across our managers, geographies, and investment strategies. Retail separate accounts were net outflows in the quarter, largely reflecting the soft closing of a SMID cap core equity model offering late last year. Assets in that strategy had grown significantly, and it was soft closed to limit ongoing asset growth in order to protect future returns. We continue to offer other SMID cap strategies, as well as mid-cap, in which we have significant capacity. Open-end fund net outflows of $1.1 billion were essentially unchanged sequentially. Consistent with market trends, U.S. retail fund net outflows were driven by equity strategies, partially offset by positive net flows in fixed income. ETF assets reached $3.4 billion on continued strong positive net flows of $0.3 billion. Over the past year, ETFs generated an organic growth rate of 73%. In terms of what we're seeing in April, investors continue to take stock of ongoing market volatility and uncertainty and remain cautious with their investment decisions. Trends in retail remain relatively consistent with the latter part of the first quarter. For institutional, known redemptions do slightly exceed known wins, but institutional flows are hard to predict. Known wins are broad-based, representing six managers, eight strategies, and include both U.S. and non-U.S. clients. Our first quarter financial results reflected the impact of seasonally higher employment expenses. Excluding those items, the operating margin was 32.7%. Earnings per share is adjusted of $5.73, declined from the fourth quarter, due in part to $1.01 per share of seasonal employment expenses. On the more comparable year-over-year basis, earnings per share is adjusted increased 6%. Turning now to capital, we continue to take a balanced approach to our capital management by investing in our growth, returning capital to shareholders, and maintaining appropriate levels of leverage. During the quarter, we used $26 million to repurchase or net settle approximately 146,000 shares. Over the past year, our repurchases have reduced shares outstanding by 3% on a net basis. In addition, we made a $23 million revenue participation payment, which reduced our contingent liability to $40 million. The bulk of the remaining revenue participation obligation will be paid in the first quarter of next year. Similarly, our final staged equity purchase of our majority-owned affiliate will be made in the third quarter of this year. We ended the quarter in a modest net debt position, as the first quarter represents our highest quarter of cash utilization, given the timing of annual incentives and a revenue participation payment. Our low-level leverage and significant cash flow generation provide ongoing opportunities to invest in the growth of the business and return capital to shareholders. With that, I'll turn the call over to Mike. Mike.

Mike Angerthal (CFO)

Thank you, George. Good to be with you all this morning. Starting with our results on slide seven, assets under management. Our total assets under management at March 31 were $167.5 billion and represented a broad range of products and asset classes. By product, institutional is our largest category at 34% of AUM. Retail separate accounts, including wealth management, at 28% and U.S. retail mutual funds at 27%. The remaining 11% comprises closed-end funds, global funds, and ETFs. We are also diversified within asset classes. In equities, between international and domestic and within domestic, well represented among mid, small, and large-cap strategies. Fixed income is well diversified across duration, credit quality, and geography. We continue to have compelling relative investment performance across products and strategies. As of March 31, 71% of rated retail fund assets and 33 funds had four or five stars, and 86% were in three, four, or five-star funds. In addition, 61% of fund AUM outperformed the median of their peer groups over the five-year period. ETFs have also had strong performance, with 91% of ETF assets exceeding median peer performance for the three-year period, and 12 of our 14 rated ETFs were rated three, four, or five stars. As George discussed, recent performance, particularly by our quality equity managers, has been compelling through the first quarter market volatility, with 73% of equity AUM beating benchmarks in the quarter. Turning to slide eight, asset flows. Sales of $6.2 billion compared with $6.4 billion in the fourth quarter, as higher sales of fixed income strategies were offset by lower sales across other asset classes. Reviewing by product, institutional sales of $1.5 billion were relatively unchanged from $1.6 billion last quarter, as higher fixed income sales, particularly emerging markets debt, were offset by lower alternatives and equity strategies. Retail separate account sales of $1.7 billion were also essentially unchanged from $1.8 billion in the prior quarter, with lower mid-cap sales mostly offset by higher small-cap, large-cap, and fixed income. Open-end fund sales of $3 billion were unchanged, with higher sales of alternative fixed income and multi-asset strategies offset by equities. Within open-end funds, ETF sales were again strong at $0.4 billion. We continue to prioritize new ETF capabilities and further availability through intermediaries. Total net outflows of $3 billion compared with $4.8 billion last quarter. Reviewing by product, institutional net outflows of $1.2 billion improved from $3.8 billion in the prior quarter. By strategy within institutional, we had positive net flows in emerging markets debt and small and mid-cap equity strategies. As always, institutional flows will fluctuate depending on the timing of client actions. Retail separate accounts had net outflows of $0.7 billion, largely related to the soft close of certain small-cap equity model offerings late last year. For open-end funds, net outflows of $1.1 billion were at essentially the same level as the prior quarter, with positive net flows in fixed income strategies. Within open-end funds, ETFs continued to generate a double-digit organic growth rate with $0.3 billion of positive net flows. Turning to slide nine, investment management fees as adjusted of $178.5 million decreased 7%, reflecting lower average assets under management and higher performance fees in the prior quarter. The average fee rate was 41.7 basis points and compared with 42 basis points in the fourth quarter. Excluding performance fees from both periods, the average fee rate was unchanged sequentially at 41.7 basis points. Looking ahead, we continue to believe an average fee rate in the range of 41-42 basis points is reasonable for modeling purposes, with performance fees of $3 million-$5 million per year incremental to that range. As always, the fee rate will be impacted by the markets and the mix of assets. Slide 10 shows the five-quarter trend in employment expenses. Total employment expenses as adjusted of $109.4 million increased 5% sequentially, reflecting $10 million of seasonal employment expenses related to the timing of annual incentives, primarily incremental payroll taxes and benefits. Excluding the seasonal items, employment expenses decreased by 5% sequentially, primarily due to lower profit-based variable incentive compensation. Employment expenses were 55.4% of revenues as adjusted, with a sequential increase due to the seasonal expenses. Excluding those items, employment expenses were 50.3% of revenues. If markets remain at current levels, it is reasonable to anticipate employment expenses as a percentage of revenues would be at the higher end of our outlook range of 49%-51%. As always, it will be variable based on market performance in particular, as well as profits and sales. Turning to slide 11, other operating expenses as adjusted continued to be in a relatively stable range as we have offset increasing costs with active expense management. For the quarter, other operating expenses were $31.3 million, essentially unchanged from the prior quarter. As a percentage of first quarter revenues, other operating expenses were 15.8%, up from 14.6% in the fourth quarter due to lower revenues. Looking ahead, we continue to be focused on managing these expenses within a narrow range. For example, we have reduced our office space in several locations and expect to generate savings of approximately $1 million per quarter from those activities starting in the third quarter of this year. Actions like these will help us continue to maintain a quarterly range of $30-$32 million, which remains reasonable for modeling purposes, all else being equal. In addition, keep in mind that our annual board of directors equity grants occur in the second quarter. Slide 12 illustrates the trend in earnings. Operating income as adjusted of $54.6 million declined from $74.5 million sequentially, in large part due to the seasonal employment expenses. Excluding those items, operating income decreased 13%, primarily due to lower average assets under management. Looking at the more comparable year-over-year period, operating income declined 3%. The operating margin as adjusted of 27.6% compared with 35.1% in the fourth quarter. Excluding the seasonal employment expenses, the operating margin was 32.7%. With respect to non-operating items, interest expense declined by $0.5 million, reflecting a lower effective interest rate on our term loan and lower average gross debt. Non-controlling interests, which reflect minority interest in one of our managers, were lower sequentially by $0.2 million. Net income as adjusted of $5.73 per diluted share, which included $1.01 of seasonal expenses, compared with $7.50 in the fourth quarter, and increased 6% over the prior year period. In terms of GAAP results, net income per share of $4.05 decreased from $4.66 per share in the fourth quarter and included $0.94 of realized and unrealized losses on investments, partially offset by $0.35 of fair value adjustments to minority interests. Slide 13 shows the trend of our capital liquidity and select balance sheet items. As a reminder, the first quarter typically represents our highest quarter of cash utilization during the year due to the timing of annual incentives and the revenue participation payments, in addition to return of capital to shareholders through the dividends, share repurchases, and net settlements. Cash and equivalents at March 31 were $135.4 million. In addition, we had $143 million of seed capital investments to support growth initiatives and $132.8 million of other investments, primarily in our managed CLOs. Working capital was $137.2 million, up 2% from $134.5 million, as cash generated more than offset return of capital and the revenue participation payment. During the first quarter, we repurchased 111,200 shares of common stock for $20 million and net settled 35,178 shares for $6.1 million to satisfy employee tax obligations. We also made a $23.1 million revenue participation payment, reducing the contingent consideration liability by 36% to $40.4 million. The majority of that liability will be paid next year in the first quarter. At March 31, gross debt to EBITDA was 0.7 times, unchanged from December 31, and we ended the quarter with $100 million of net debt, or 0.3 times EBITDA. EBITDA in the first quarter, while down sequentially due to seasonal employment items, was up modestly from the prior year level. Our adequate levels of working capital and modest leverage provide financial flexibility to continue to invest in the business and return capital. As I previously noted, our intangible assets continue to provide a cash tax benefit, which is not included in our earnings per share as adjusted. The net present value of the tax asset is approximately $112 million, or $16 on a per share basis. With that, let me turn the call back over to George. George.

George Aylward (President and CEO)

Thanks, Mike. We will now take all of your questions. Dee Dee, would you open up the lines, please?

Operator (participant)

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from Ben Budish of Barclays. Your line is open.

Ben Budish (Equity Research Analyst)

Hi, good morning, and thank you for taking the question. Maybe just to start, I think you indicated the fee rate going forward was probably going to be in between the range. Can you provide any more color on where things are kind of shaking out as we get into April? I was wondering if you could also touch on just some of the fee rate changes we saw in the quarter. U.S. retail funds a little bit lower, ETFs seem to be trending higher. I'm sure there's mix within the mix, but any additional color there would be helpful. Thank you.

Mike Angerthal (CFO)

Yeah, hey, Ben. As you know, the fee rate will be impacted by many factors, including the markets, fee rate differential, and sales versus redemptions. The markets impacted the fee rate. Really, the change, as you noted on the open-end funds, was due to the mix of assets, really the change from some of the higher fee rate on the equity side to just a slightly lower fee on the fixed income side. Notably, fee rate in and of itself does not have an impact or directly reflect profitability, still targeting incremental margins in that 50-55% range. Just currently, as we look ahead, I do think the range that we talked about is appropriate for modeling. If there are any updates to that, we'll reflect that and communicate it accordingly.

Ben Budish (Equity Research Analyst)

Understood. Maybe a follow-up just on the capital allocation side. You bought more shares in the quarter than you had in the past several quarters. I know you're always cognizant of liquidity in your stock, but curious what your appetite is, just kind of given the recent share performance and market backdrop.

George Aylward (President and CEO)

Yeah. I mean, as you commented, we always evaluate our alternative uses of capital every quarter. One of the factors we do evaluate is our relative perspective on how our stock is trading. As you correctly note, we did increase the amount of repurchases we did compared to prior quarters. That will continue to be a factor as we sort of decide what the next repurchase levels will be. Currently, as Mike indicated in his comments, we're still at low levels of leverage. We're currently generating a lot of cash flow. Again, while we do invest in the business, we do think return of capital is critical. Again, we're very cognizant of our perspective on how that stock is trading. That absolutely will figure into our decisions on what to do in the next few quarters.

Ben Budish (Equity Research Analyst)

All right. Understood. Thanks for taking my questions.

George Aylward (President and CEO)

Thank you.

Operator (participant)

Thank you. As a reminder, if you have a question, please press star 11. Our next question comes from Bill Katz of TD Cowen. Your line is open.

Bill Katz (Senior Equity Analyst)

Great. Thanks very much. Just starting with the SMAs, that has been a nice driver for you over the last number of quarters, and it flipped negative. I think you mentioned in this quarter, you mentioned that you had soft-closed a vehicle. Can you just sort of size how big that vehicle is, what percentage of the 2024 flows that represents? As you look across your broader SMA platform, are there any other vehicles that might be facing some kind of capacity constraints?

George Aylward (President and CEO)

Yeah. For SMAs, that has been an area where we've consistently had growth over a period of time. As we indicated, and one of the strategies that have been very successful, there was an appropriate soft closing of that. That was coincident then, obviously, then with the challenges in the market in the first quarter, right? Whenever we have a strategy that we put through a soft close, our goal is really just to then encourage investors to consider other alternative or similar strategies. In that case, we actually have very similar strategies. That was a SMIDCAP core. We have other very attractive strategies as well in the SMID and the MIDCAP. We were trying to do that in a quarter of a little bit of volatility and uncertainty in terms of how investors should behave. Our offerings are generally broad-based. As indicated in the last quarter, we've incubated and launched several new strategies. Some of my comments in the beginning of today's call, I indicated that we've done some additional structural changes in terms of enhancing our ability to expand the number of fixed income SMAs. We continue to be focused on taking advantage of the fact that we have been successful with SMAs and their growth, and then continuing to just make more offerings available through them. For the specifics on the strategies and capacity, Mike?

Mike Angerthal (CFO)

Yeah. I think we feel good about capacity and do not have any specific capacity constraints on other areas in the retail channel. I think what we have been pleased with is moving up in the capitalization. We have seen MIDCAP looking year over year on the sales in MIDCAP, they are up meaningfully. We have been able to, at other times, increase larger capitalizations as we have soft-closed other products, whether it is small cap or now SMIDCAP. We have seen and had success in moving up the capitalization and feel very good about MIDCAP, both on the core, specifically on the core side. There is significant available capacity in that area. We do expect that to be a contributor to growth going forward. Okay. Maybe a big picture question. I know we've chatted about this over the last couple of quarters. I think usually when you make any kind of strategic change, it tends to be in the first quarter of the new year. What's your latest thinking in terms of trying to better monetize the deferred tax asset by transitioning that to a potentially lower effective tax rate as it affects adjusted earnings from here? Yeah. I think you're referring to the tax attributes and the presentation of those tax attributes. I don't necessarily know if it's monetizing the tax attributes. It's more of a reporting factor because we are achieving the economic benefit from those tax attributes. We did provide just the latest context around that on a NPV basis. I think it comes out to around $16 a share. We have talked about there being a divergence in practice where some industry participants will modify and adjust their tax rate and estimate that and lower their tax rate. We do continue to evaluate it. It is important to us to provide transparency because there is real value that we do achieve from those tax benefits. We will continue to evaluate and ensure we think we are providing the appropriate transparency to ensure investors ascribe the value that we know is there. On a sort of adjusting it from an EPS basis, it does come out to like $2.50 per year. If you want to just do the math that extends on a per share basis rather than thinking of it as an asset, it's about $2.50 per share. We'll continue to provide that transparency and ensure investors are aware that that is an area that does provide value in the cash flow generation of the business.

Bill Katz (Senior Equity Analyst)

Great. Thank you very much.

Operator (participant)

Thank you. This concludes our question and answer session. I would now like to turn the conference back over to Mr. Aylward.

George Aylward (President and CEO)

Great. Thank you so much. As always, I want to thank everyone today for joining us and encourage you to reach out if you have any other further questions. Thank you.

Operator (participant)

That concludes today's call. Thank you for participating, and you may now disconnect.