Victory Capital Reports Fourth Quarter 2018 Results

Fourth Quarter 2018 Highlights¹

• Assets under management (“AUM”) of $52.8 billion
• Strong investment performance, with 57%, 68%, 74% and 88% of AUM outperforming its respective benchmarks over the trailing one year, three years, five years and 10 years, respectively
• Gross flows of $4.0 billion; net outflows of $1.0 billion
• Operating margin of 26.8%; adjusted EBITDA margin of 37.9%
• $0.19 per diluted share of GAAP earnings
• $0.38 per diluted share of adjusted net income with tax benefit
• $34.4 million of cash flow from operations

CLEVELAND, Ohio, Feb. 06, 2019 (GLOBE NEWSWIRE) — Victory Capital Holdings, Inc. (NASDAQ: VCTR) (“Victory Capital” or “the Company”) today reported its results for the three months and full year ended December 31, 2018.

“I am pleased to report that Victory Capital delivered strong investment and financial performance during the fourth quarter of 2018, a period of unprecedented volatility for the financial markets,” said David Brown, Chairman and Chief Executive Officer. “Strong operating margins, cash flows and expense control during the volatile quarter highlighted the health and sustainability of our integrated multi-boutique business model.

“Our model provides diversification across asset classes, product types and business channels and has enabled us to build scale in operations, administration and technology. As a result, we have been able to reinvest efficiently in the business and allocate the resources necessary to deliver superior service to our clients and Investment Franchises.

“Our Franchises and Solutions Platform delivered strong investment performance during the quarter, resulting in 57% of our AUM outperforming their respective benchmarks over the trailing one-year, 68% over the three-year, 74% over the five-year, and 88% over the 10-year periods.

“As previously reported, total AUM decreased to $52.8 billion as of December 31, 2018, due primarily to market depreciation. Gross flows in the fourth quarter were strong at $4.0 billion, while resulting in net flows of ($1.0) billion as investors retreated from higher risk asset classes and rotated into cash.

“Overall, our pipeline for 2019 is healthy as are our sales prospects, fueled by robust investment performance and a diverse product set,” Mr. Brown continued.

“Momentum in VictoryShares ETFs remained strong in 2018, with net flows of $121 million for the quarter and $1.1 billion for the full year. Our ETFs have achieved positive net flows every quarter since we entered the ETF business in 2015. During 2018, our ETF market share increased 33% compared with year-end 2017, according to Morningstar.

“Looking ahead, we intend to grow organically by leveraging the diverse capabilities of our Investment Franchises and Solutions Platform, supported by our well-established distribution system. In addition, we remain committed to inorganic growth through acquisitions. In the second half of 2018, we announced two strategic acquisitions. During the fourth quarter, we announced our agreement to purchase USAA Asset Management Company, which includes its mutual fund, ETF and 529 College Savings Plan businesses. This will greatly enhance our existing distribution platform with the addition of USAA’s direct membership channel. This announcement followed the third-quarter disclosure of our planned acquisition of Harvest Volatility Management.

“Together, these two acquisitions will significantly diversify our AUM and investment capabilities, while further enhancing economies of scale. Plans to integrate both businesses are on track, and we are on target to accomplish our synergy goal of $100 million for the USAA transaction. We expect to close both transactions in the second quarter of 2019. 

“Our M&A pipeline remains active as we continue to seek prospects representing the ‘growers of the future’. This includes adding unique, innovative products and solutions that solve issues for client portfolios. As in the past, serving the needs of our clients remains our top priority.”

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¹ Adjusted measures are non-GAAP financial measures. An explanation of these non-GAAP financial measures is included under the heading “Information Regarding Non-GAAP Financial Measures” at the end of this press release. Please see the non-GAAP reconciliation tables.

The table below presents AUM, and certain GAAP and non-GAAP (“adjusted”) financial results.

AUM, Flows and Investment Performance

Victory Capital’s AUM decreased by $10.8 billion to $52.8 billion at December 31, 2018, compared to $63.6 billion at September 30, 2018. The decrease was due to market depreciation of $9.9 billion in addition to net outflows of $1.0 billion. Gross flows for the fourth quarter were $4.0 billion. 

As of December 31, 2018, Victory Capital offered 71 investment strategies through its nine autonomous Investment Franchises and Solutions Platform. The table below presents outperformance against benchmarks by AUM and strategies as of December 31, 2018.

Fourth Quarter of 2018 Compared to Third Quarter of 2018

For the quarter ended December 31, 2018, GAAP Net Income decreased 33% to $13.9 million, or $0.19 per diluted share, compared to GAAP Net Income of $20.6 million, or $0.29 per diluted share, for the third quarter of 2018. GAAP operating margin was 26.8% for the quarter compared to 29.4% for the third quarter of 2018. Adjusted Net Income with tax benefit decreased 16% to $27.0 million, or $0.38 per diluted share comprised of $0.33 per diluted share in Adjusted Net Income and $0.05 per diluted share in tax benefit, compared to $32.3 million, or $0.45 per diluted share comprised of $0.40 per diluted share in Adjusted Net Income and $0.05 per diluted share in tax benefit, for the third quarter of 2018.

Adjusted EBITDA and Adjusted EBITDA margin were $36.4 million and 37.9%, respectively, for the quarter ended December 31, 2018, compared to $43.3 million and 40.1% in the third quarter of 2018. Net Income, Adjusted Net Income and Adjusted EBITDA decreased due to lower revenue partially offset by lower variable operating expenses.

• Revenue was $96.0 million, a decrease from $108.1 million for the third quarter of 2018 due to a decrease in average AUM and a decrease in the realized fee rate due to asset mix.
• Operating expenses decreased to $70.2 million, compared to $76.3 million in the third quarter of 2018 primarily due to lower AUM and revenue levels which drive certain variable expenses, partially offset by an increase in acquisition costs.

Fourth Quarter of 2018 Compared to Fourth Quarter of 2017

For the quarter ended December 31, 2018, GAAP Net Income increased 24% to $13.9 million, or $0.19 per diluted share, compared to $11.2 million, or $0.19 per diluted share, in the fourth quarter of 2017. GAAP operating margin increased to 26.8% for the quarter from 25.5% for the fourth quarter of 2017. Adjusted Net Income with tax benefit increased 17% to $27.0 million, or $0.38 per diluted share comprised of $0.33 per diluted share in Adjusted Net Income and $0.05 per diluted share in tax benefit in the fourth quarter of 2018, compared to $23.1 million, or $0.39 per diluted share comprised of $0.30 per diluted share in Adjusted Net Income and $0.09 per diluted share in tax benefit, in the fourth quarter of 2017. Net Income and Adjusted Net Income increased primarily due to lower interest expense in the fourth quarter of 2018 as a result of refinancing activities and debt pre-payments.

Adjusted EBITDA and Adjusted EBITDA margin were $36.4 million and 37.9%, respectively, for the fourth quarter of 2018, compared to $40.0 million and 37.9%, respectively, for the fourth quarter a year ago. Adjusted EBITDA decreased due to lower revenue, partially offset by lower variable operating expenses. 

• Revenue decreased $9.6 million to $96.0 million, compared to $105.6 million for the fourth quarter of 2017, due to a decrease in average AUM and a decrease in the realized fee rate due to asset mix.
• Operating expenses decreased 11% to $70.2 million, compared to $78.7 million in the fourth quarter of 2017, primarily due to lower AUM and revenue levels which drive certain variable expenses, partially offset by an increase in acquisition costs.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

For the year ended December 31, 2018, GAAP Net Income increased 147% to $63.7 million, or $0.90 per diluted share, compared to $25.8 million, or $0.43 per diluted share, for the year ended December 31, 2017. GAAP operating margin increased to 27.7% for the year ended December 31, 2018 from 22.0% for the year ended December 31, 2017. Adjusted Net Income with tax benefit increased 41% to $115.5 million, or $1.64 per diluted share comprised of $1.45 per diluted share in Adjusted Net Income and $0.19 per diluted share in tax benefit for the year ended December 31, 2018, compared to $81.7 million, or $1.37 per diluted share comprised of $1.04 per diluted share in Adjusted Net Income and $0.33 per diluted share in tax benefit, for the year ended December 31, 2017.

Adjusted EBITDA and Adjusted EBITDA margin were $160.2 million and 38.7%, respectively, for the year ended December 31, 2018, compared to $149.1 million and 36.4%, respectively, for the year ended December 31, 2017. Net Income, Adjusted Net Income and Adjusted EBITDA increased due to higher revenue coupled with operational efficiencies, lower intangible amortization and reduced distribution expense related to AUM levels and, specific to Net Income and Adjusted Net Income, lower interest expense as a result of refinancing activities and debt pre-payments.

• Revenue increased to $413.4 million for the year ended December 31, 2018, compared to $409.6 million for the year ended December 31, 2017, due to higher average AUM, partially offset by a decrease in the realized fee rate due to asset mix.
• Operating expenses for the year ended December 31, 2018 decreased 6% to $298.9 million, compared to $319.5 million for the year ended December 31, 2017, primarily due to operational efficiencies, lower intangible amortization and reduced distribution expense related to AUM levels.

Balance Sheet / Capital Management

Cash and cash equivalents were $51.5 million at December 31, 2018, compared to $12.9 million at December 31, 2017. During the quarter, the Company did not make any debt pay-downs with cash on hand. The term loan balance at December 31, 2018 was $280.0 million.

During the quarter, the Company repurchased 498,578 shares at an average price of $9.03 per share.

Conference Call, Webcast and Slide Presentation

The Company will host a conference call and webcast at 8:30 a.m. Eastern Time today, February 6, 2019. Analysts and investors may participate in the question-and-answer session. The call can be accessed via telephone at (866) 465-5145 (domestic) or (409) 220-9945 (international). Please reference the Victory Capital Conference Call. A recorded replay of the conference call will be available shortly after the conclusion of the live call and can be accessed until February 20, 2019 by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) and enter the Conference ID Number 5157508.

The slide presentation and webcast of the conference call can be accessed on the Events and Presentations page of the Company’s investor relations website at https://ir.vcm.com.

About Victory Capital

Victory Capital is a global investment management firm operating a next-generation, integrated multi-boutique business model with $52.8 billion in assets under management as of December 31, 2018.

Victory Capital’s differentiated model is comprised of nine Investment Franchises, each with an independent culture and investment approach. Additionally, the Company offers a rules-based Solutions Platform, featuring the VictoryShares ETF brand, as well as custom and multi-asset class solutions. The Company’s Investment Franchises and Solutions Platform are supported by a centralized distribution, marketing and operational environment, in which the investment professionals can focus on the pursuit of investment excellence.

Victory Capital provides institutions, financial advisors and retirement platforms with a variety of asset classes and investment vehicles, including separately managed accounts, collective trusts, mutual funds, ETFs, UCITs and UMA/SMA vehicles.

For more information, please visit www.vcm.com. Go to www.victorysharesliterature.com for ETF prospectuses or www.victoryfundliterature.com for mutual fund prospectuses.

FORWARD-LOOKING STATEMENTS 

This press release may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may include, without limitation, any statements preceded by, followed by or including words such as “target,” “believe,” “expect,” “aim,” “intend,” “may,” “anticipate,” “assume,” “budget,” “continue,” “estimate,” “future,” “objective,” “outlook,” “plan,” “potential,” “predict,” “project,” “will,” “can have,” “likely,” “should,” “would,” “could” and other words and terms of similar meaning or the negative thereof. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors beyond Victory Capital’s control, as discussed in Victory Capital’s filings with the SEC, that could cause Victory Capital’s actual results, performance or achievements to be materially different from the expected results, performance or achievements expressed or implied by such forward-looking statements.

Although it is not possible to identify all such risks and factors, they include, among others, the following: reductions in AUM based on investment performance, client withdrawals, difficult market conditions and other factors; the nature of the Company’s contracts and investment advisory agreements; the Company’s ability to maintain historical returns and sustain its historical growth; the Company’s dependence on third parties to market its strategies and provide products or services for the operation of its business; the Company’s ability to retain key investment professionals or members of its senior management team; the Company’s reliance on the technology systems supporting its operations; the Company’s ability to successfully acquire and integrate new companies; the concentration of the Company’s investments in long-only small- and mid-cap equity and U.S. clients; risks and uncertainties associated with non-U.S. investments; the Company’s efforts to establish and develop new teams and strategies; the ability of the Company’s investment teams to identify appropriate investment opportunities; the Company’s ability to limit employee misconduct; the Company’s ability to meet the guidelines set by its clients; the Company’s exposure to potential litigation (including administrative or tax proceedings) or regulatory actions; the Company’s ability to implement effective information and cyber security policies, procedures and capabilities; the Company’s substantial indebtedness; the potential impairment of the Company’s goodwill and intangible assets; disruption to the operations of third parties whose functions are integral to the Company’s ETF platform; the Company’s determination that Victory Capital is not required to register as an “investment company” under the 1940 Act; the fluctuation of the Company’s expenses; the Company’s ability to respond to recent trends in the investment management industry; the level of regulation on investment management firms and the Company’s ability to respond to regulatory developments; the competitiveness of the investment management industry; the dual class structure of the Company’s common stock; the level of control over the Company retained by Crestview GP; the Company’s status as an emerging growth company and a controlled company; and other risks and factors listed under “Risk Factors” and elsewhere in the Company’s filings with the SEC.

Such forward-looking statements are based on numerous assumptions regarding Victory Capital’s present and future business strategies and the environment in which it will operate in the future. Any forward-looking statement made in this press release speaks only as of the date hereof. Except as required by law, Victory Capital assumes no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in the forward-looking statements, even if new information becomes available in the future.

Investor Relations Website

Victory Capital may use the Investor Relations section of its website, https://ir.vcm.com, to disclose material information to investors and the marketplace as a means of disclosing material, non-public information and for complying with disclosure obligations under Regulation Fair Disclosure (“Reg FD”). Victory Capital encourages investors, the media and other interested parties to visit its investor relations website regularly.

Contacts
Investors:
Lisa Mueller, 310-622-8231
lmueller@finprofiles.com

Media:
Tricia Ross, 310-622-8226
tross@finprofiles.com

Victory Funds are distributed by Victory Capital Advisers, Inc. (VCA). VictoryShares ETFs are distributed by Foreside Fund Services, LLC. Victory Capital Management Inc. (VCM) is the adviser to VictoryShares ETFs and Victory Funds. VCM and VCA are affiliated. They are not affiliated with Foreside Fund Services, LLC.

Information Regarding Non-GAAP Financial Measures

Victory Capital uses non-GAAP financial measures referred to as Adjusted EBITDA and Adjusted Net Income to measure the operating profitability of the Company. These measures eliminate the impact of one-time acquisition, restructuring and integration costs and demonstrate the ongoing operating earnings metrics of the Company. The Company has included these non-GAAP measures to provide investors with the same financial metrics used by management to assess the operating performance of the Company.

Adjusted EBITDA

Adjustments made to GAAP Net Income to calculate Adjusted EBITDA are:

• Adding back income tax;
• Adding back interest paid on debt and other financing costs net of interest income;
• Adding back depreciation on property and equipment;
• Adding back other business taxes;
• Adding back amortization of acquisition-related intangibles;
• Adding back the expense associated with stock-based compensation associated with equity issued from pools that were created in connection with the management-led buyout with Crestview GP from KeyCorp, the Munder Acquisition and the RS Acquisition and as a result of any equity grants related to the IPO;
• Adding back direct incremental costs of acquisitions and the IPO, including expenses associated with third-party advisors, proxy solicitations of mutual fund shareholders for transaction consents, vendor contract early termination costs, loss on other receivable recorded in connection with an acquisition and severance, retention and transaction incentive compensation;
• Adding back debt issuance costs;
• Adding back pre-IPO governance expenses paid to the Company’s private equity partners that terminated as of the completion of the IPO; and
• Adjusting for earnings/losses on equity method investments.

Adjusted Net Income

Adjustments made to GAAP Net Income to calculate Adjusted Net Income are:

• Adding back other business taxes;
• Adding back amortization of acquisition-related intangibles;
• Adding back the expense associated with stock-based compensation associated with equity issued from pools that were created in connection with the management-led buyout with Crestview GP from KeyCorp, the Munder Acquisition and the RS Acquisition and as a result of any equity grants related to the IPO;
• Adding back direct incremental costs of acquisitions and the IPO, including expenses associated with third-party advisors, proxy solicitations of mutual fund shareholders for transaction consents, vendor contract early termination costs, loss on other receivable recorded in connection with an acquisition and severance, retention and transaction incentive compensation;
• Adding back debt issuance costs;
• Adding back pre-IPO governance expenses paid to the Company’s private equity partners that terminated as of the completion of the IPO;
• Subtracting an estimate of income tax expense on the adjustments; and
• Subtracting the impact of remeasuring the U.S. net deferred taxes under the Tax Cuts and Jobs Act.

Tax Benefit of Goodwill and Acquired Intangibles

Due to Victory Capital’s acquisitive nature, tax deductions allowed on acquired intangible assets and goodwill provide it with additional significant supplemental economic benefit. The tax benefit of goodwill and intangibles represents the tax benefits associated with deductions allowed for intangibles and goodwill generated from prior acquisitions in which the Company received a step-up in basis for tax purposes. Acquired intangible assets and goodwill may be amortized for tax purposes, generally over a 15-year period. The tax benefit from amortization on these assets is included to show the full economic benefit of deductions for all acquired intangibles with a step-up in tax basis.