VRTS Q1 2025: $16 Deferred Tax Asset Adds $2.50 to Adjusted EPS
- Return of capital discipline: The executives emphasized that they are consistently evaluating alternative capital allocation approaches and have increased share repurchases compared to prior quarters, supported by low leverage and robust cash flow.
- Strategic SMA platform management: They highlighted the soft closing of a SMID-Cap Core strategy to preserve performance and capacity, while expanding similar attractive strategies—indicating potential for continued asset growth in their SMA offerings.
- Deferred tax asset value: The discussion noted a deferred tax asset with a net present value of approximately $16 per share, contributing roughly $2.50 per share to adjusted earnings, which underscores hidden value benefiting future EPS.
- Fee Rate Pressure: Management noted that the shift in asset mix—from higher-fee equity products to lower-fee fixed income products—had a direct impact on fee levels, which could press margins in a challenging market environment.
- Soft-Close of SMID-Cap Core SMA: The decision to soft-close the SMID-Cap Core vehicle, as discussed in the Q&A, can be seen as a signal of capacity concerns amid market volatility, potentially limiting future asset growth.
- Capital Allocation Caution: Increased share repurchases highlighted in the Q&A suggest the firm may favor returning capital over reinvesting in growth, which might constrain long-term expansion opportunities in a volatile market.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | –2.3% | Total revenue declined from $222.0 million in Q1 2024 to $217.9 million in Q1 2025, largely driven by decreased average fee rates and lower assets under management that reduced both investment management and ancillary fees relative to the previous period. |
Investment Management Fees | –1.2% | Investment management fees dropped slightly from $188.4 million in Q1 2024 to $186.1 million in Q1 2025; this decrease is attributed to lower fee rates and a slight decline in average assets under management compared to the previous period. |
Distribution and Service Fees | –8.8% | Distribution and service fees fell from approximately $14.03 million in Q1 2024 to $12.8 million in Q1 2025; the sharper decline reflects weaker sales and a more pronounced reduction in average assets under management for open-end funds compared to the prior period. |
Operating Income | +13% | Operating income improved from $32.3 million in Q1 2024 to $36.6 million in Q1 2025, driven by more effective cost management including lower employment and amortization expenses, which helped offset revenue pressures experienced in other fee streams compared to the previous period. |
Net Income | –26% | Despite the operating income gain, net income dropped significantly from $37.87 million in Q1 2024 to $28.05 million in Q1 2025, largely due to increased income tax expenses and other adverse non-operating factors that outweighed the operating improvements relative to the prior period. |
Cash and Cash Equivalents | +9.3% | The cash and cash equivalents balance grew from $123,880 thousand in Q1 2024 to $135,380 thousand in Q1 2025, reflecting stronger financing activity that bolstered the liquidity position even as revenue-related pressures persisted compared to the previous period. |
Operating Cash Flow | Improved 89% | Operating cash flow markedly improved, with the net cash outflow narrowing from –$34.53 million in Q1 2024 to –$3.79 million in Q1 2025; this improvement was primarily due to a $27.9 million increase in net sales of investments by consolidated investment products that helped significantly reduce the cash outflow seen in the prior period. |
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Deferred Tax
Q: How to monetize deferred tax asset?
A: Management explained that the tax asset provides an economic benefit of $16 per share, effectively adding about $2.50 per share to annual adjusted earnings, emphasizing transparency in its impact. -
Fee Rates
Q: What is the fee rate outlook?
A: They noted that market conditions have driven a shift from higher equity fees to lower fixed income fees, targeting incremental margins in the 50%–55% range. -
Capital Allocation
Q: How are share repurchases evolving?
A: Management increased repurchases in light of favorable stock pricing and strong cash flow while balancing investments back into the business. -
SMA Capacity
Q: What’s the impact of the soft close?
A: The soft close of the SMID-Cap Core product was intended to protect future returns, with similar attractive strategies available and no significant capacity concerns noted.
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