Shares of global investment firm – Janus Capital Group, Inc. (JNS) were up 1.4% following the release of its third-quarter 2014 results on Oct 23, before the market opened. The company reported third-quarter earnings per share attributable to common shareholders of 22 cents, in line with the Zacks Consensus Estimate. However, results compared favorably with the prior-year quarter adjusted earnings of 17 cents. The year-over-year improvement perhaps translated to the share price movement.
Results reflected top-line growth and increased assets under management (:AUM), depicting stability in earnings. However, net outflows, market depreciation and a rise in operating expenses were headwinds for the quarter.
Net income stood at $40.9 million, up 25.5% from $32.6 million in the prior-year quarter.
Quarter in Detail
Total revenue increased 8.9% year over year to $237.0 million, primarily due to higher investment management fee revenues, shareowner servicing fees and other and reduced negative performance fees. However, revenues were below the Zacks Consensus Estimate of $239.0 million.
Total operating expenses increased 4.2% on a year-over-year basis to $165.4 million in the quarter. The increase was primarily a result of higher employee compensation and benefits and distribution expenses. These were partly offset by lower depreciation and amortization along with reduced long-term incentive compensation.
Asset Position
Average AUM increased to $176.5 billion from $165.2 billion in the prior-year quarter and $174.4 billion in the previous quarter.
As of Sep 30, 2014, Janus Capital reported total AUM of $174.4 billion, up from $166.7 billion as of Sep 30, 2013 and down from $177.7 billion as of Jun 30, 2014.
Notably, the reported quarter witnessed decline in complex-wide assets, reflecting long-term net outflows of $2.1 billion and net market depreciation of $1.2 billion. Fundamental and mathematical equity long-term net outflows summed to $2.1 billion and $0.3 billion, while fixed income long-term net inflows totaled $0.3 billion during the quarter.
Balance Sheet
As of Sep 30, 2014, Janus Capital had stockholders’ equity of $1.6 billion, cash and investments of $776.1 million and outstanding debt of $449.8 million compared with stockholders’ equity of $1.5 billion, cash and investments of $756.5 million and outstanding debt of $509.0 million in the prior quarter.
Cash flow from operations during the reported quarter was $100.1 million compared with $78.3 million in the prior-year quarter.
Capital Deployment Activity
During third-quarter 2014, Janus Capital repurchased over 2.09 million shares of its common stock at an average price of $12.14 per share and a total cost of $25.4 million.
Key Aspects of the Earnings Call:
Management clearly stated that recent hiring of the eminent bond-fund manager Bill Gross did not bear impact on the quarterly results. It mentioned that following announcement of the hiring, there were just three days left for the quarter to wrap up. Further, Gross took over as portfolio manager on Oct 6 in the fourth quarter.
Management believes that Janus Global Unconstrained Bond is set to benefit under Gross’ management. It is optimistic that the company will have an increased client base as it strengthens its fixed income space.
Management also sees promising growth prospects owing to the recent acquisition deal. In order to tap opportunities in the growing ETF market, Janus Capital is set to acquire VS Holdings Inc., the parent company of Velocity Shares, LLC. VelocityShares is a leading provider of institutionally-focused exchange-traded products (“ETPs”), including exchange-traded funds (“ETFs”), that are focused on offering volatility management solutions.
The deal includes an initial upfront cash consideration of $30 million and is expected to close in fourth-quarter 2014.
Janus Capital’s Chief Executive Officer Richard Mac Coy Weil mentioned that the joining of Bill Gross is a “game changer” for the company while the Velocity Shares acquisition is a “huge positive”.
Expense Outlook
In the third quarter, total compensation-to-revenue ratio, which includes long-term incentive expenses, was 39.6%. Base salaries, commissions and variable cash compensation contribute to this ratio. Management stated that new investments will result in increased headcounts, which will consequently lead to higher base salaries. Further, a period of increased sales would result in higher commissions expense. Hence, compensation-to-revenue ratios are expected to rise in 2015.
For fourth-quarter 2014, assuming a stable market, long-term incentive expenses (LTI) are expected to be $14 million to $15 million. Further, management stated that while year-to-date the company experienced the benefit of negative LTI expense, such a benefit is not expected to recur in 2015. This is expected to further add to higher total comp-to-revenue ratios in 2015.
Given the company’s ongoing investments in some businesses, management expects discretionary expenses to trend higher in the fourth quarter. For 2015, such expenses are expected to exhibit a slight increase.
Our Viewpoint
Results do not reflect a strong quarter for Janus Capital. However, we remain encouraged by the company’s strategic initiatives to boost business.
The company has the best-in-class investment boutique with potential for AUM and revenue along with competitive leverage growth. Capital deployment activities of the company are also commendable. However, weakness in flows remains a matter of concern.
Though the fixed income segment and global operations are showing signs of improvement, the company’s equity-heavy portfolio makes it vulnerable to the equity market. Nevertheless, given its healthy balance sheet, we believe Janus Capital has the potential to perform well in the long run aided by a significant rebound in these markets.
Janus Capital currently carry a Zacks Rank #2 (Buy).
Among other investment managers, Ameriprise Financial, Inc. (AMP) is scheduled to report September quarter-end results on Oct 28, while Invesco Ltd. (IVZ) will report on Oct 30 and Legg Mason Inc. (LM) on Oct 31.
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