Invesco Ltd. (IVZ) reported first quarter operating earnings of 41 cents per share missing the Zacks Consensus Estimate by a penny. However, the results compare favorably with earnings of 27 cents in the prior-year quarter.
On a GAAP basis, earnings came in at 38 cents per share compared with 37 cents in the prior quarter and 21 cents in the year-ago quarter. GAAP results for the reported quarter included $24.2 million of transaction and integration charges.
Invesco’s earnings soared over the prior-year quarter primarily on an increase in net revenue as a result of inclusion of the retail asset management business of Morgan Stanley (MS), partially offset by an increase in operating expenses. Invesco had acquired Morgan Stanley’s business division in the second quarter of 2010. The company’s assets under management also continued to grow during the reported quarter.
Quarter in Detail
Invesco s adjusted net income decreased 8.4% from the prior quarter but surged by a whopping 60% from the prior year quarter to $191.7 million.
Invesco’s adjusted net revenue fell 1.3% sequentially but rose 38.1% year over year to $751.8 million. On a sequential basis, revenues plummeted primarily due to decreases in performance fees, which were partially offset by rise in investment management fees.
Also, aided by favorable foreign exchange rate changes, net revenue increased $6.6 million from the prior quarter. Net revenue missed the Zacks Consensus Estimate of $1.1 billion.
Adjusted investment management fees rose 2.1% sequentially and 32.1% year over year to $816.1 million. Service and distribution fees declined 1.6% sequentially but surged 76.6% year over year to $198.7 million.
Adjusted operating expenses declined 0.4% sequentially but increased 32.7% year over year to $479.7 million. On a sequential basis, employee compensation expenses decreased 1.8% to $299.7 million primarily on reduced bonus expenses associated with performance fees.
This was partly offset by rise in base salary, seasonally higher payroll taxes and higher severance costs. Marketing expenses moved up 3.7% from the prior quarter to $53.8 million.
Adjusted operating margin for the quarter was 36.2% compared with 36.8% in the prior quarter and 33.6% in the prior-year quarter.
Assets under Management
Increased market value, as a result of the gradual recovery in global equity markets, improved assets under management (AUM) 4.1% sequentially and 40.2% year over year to $641.9 billion as of March 31, 2011. Average AUM for the reported quarter was $630.2 billion compared with $616.0 billion in the prior quarter and $449.6 billion in the prior-year quarter.
Long-term net inflows were $6.6 billion compared with net outflows of $17.7 billion in the prior quarter and net inflows of $3.6 billion in the prior-year quarter. Money market net inflow was $2.6 billion as against net outflow of $1.6 billion in the prior quarter and net outflow of $10.6 billion in the year-ago quarter.
Dividend Update
Concurrent with the earnings release, the company declared a first quarter dividend of 12.25 cents per share, up 11.4% from 11 cents paid in the prior quarter. The dividend will be paid on June 8, 2011, to shareholders of record as of May 20, 2011.
Share Repurchase
During the reported quarter, Invesco repurchased 2.1 million shares for $53.1 million, at an average price of $25.58.
Peer Performance
Last week, one of Invesco’s peers, BlackRock Inc. (BLK) reported first quarter 2011 operating earnings of $2.96 per share, exceeding the Zacks Consensus Estimate of $2.75. Better-than-expected results were primarily aided by strong top-line growth and improved equity markets, which were offset partially by higher operating expenses.
While another peer, Franklin Resources Inc. (BEN) is scheduled to announce second quarter 2011 results on April 28.
Our Take
Improving long-term investment performance propelled by a gradual recovery in the global equity market is expected to boost operating results over the mid to long term. Though rising operating expenses will remain near-term headwinds, significant improvement in operating leverage from Invesco’s cost control initiatives is expected over the long term.
The company is also poised to benefit from improved global investment flows due to its broad diversification. However, we remain concerned about increased redemptions and a volatile U.S. dollar.
Invesco currently retains a Zacks # 3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the fundamentals, we maintain our long-term “Neutral” recommendation on the stock.
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