Earnings call transcript: Virtus Investment Partners Q1 2025 misses EPS forecast

Virtus Investment Partners reported its Q1 2025 earnings, revealing an earnings per share (EPS) of $5.73, which fell short of the anticipated $5.92. The company’s revenue, however, exceeded expectations, reaching $217.9 million against a forecast of $201.99 million. Following the announcement, Virtus’ stock price experienced a decline of 2.92%, closing at $156.84. Trading at a P/E ratio of 8.86x and showing strong fundamentals, InvestingPro analysis suggests the stock is currently undervalued compared to its Fair Value.

Key Takeaways

• Virtus missed its EPS forecast by 3.2%, despite a 6% increase year-over-year.
• Revenue surpassed expectations by 7.9%, reaching $217.9 million.
• Total assets under management decreased to $167.5 billion.
• The company is expanding its offerings in ETFs and global funds.

Company Performance

Virtus Investment Partners saw a mixed performance in Q1 2025. While revenue growth surpassed expectations, the EPS fell short of analyst forecasts. The company managed to increase its EPS by 6% year-over-year, highlighting operational improvements despite market volatility. The asset management firm continues to face challenges with a decline in total assets under management and net outflows, albeit improved from the previous quarter.

Financial Highlights

• Revenue: $217.9 million, up from the forecast of $201.99 million.
• Earnings per share: $5.73, below the forecast of $5.92.
• Operating margin (adjusted): 27.6%, or 32.7% excluding seasonal expenses.
• Total assets under management: $167.5 billion, down from the previous quarter.

Earnings vs. Forecast

Virtus’ actual EPS of $5.73 missed the forecast of $5.92 by 3.2%, marking a significant deviation. This miss contrasts with the company’s historical trend of meeting or exceeding earnings expectations. However, the revenue surprise of 7.9% above forecast highlights strong sales performance, mitigating some investor concerns.

Market Reaction

Following the earnings release, Virtus’ stock price fell by 2.92%, reflecting investor disappointment with the EPS miss. The stock has declined 25.08% over the past six months, now trading closer to its 52-week low of $142.18, contrasting with broader market trends where many financial stocks have shown resilience. The company maintains strong fundamentals with a healthy current ratio of 1.81, indicating solid short-term liquidity.

Outlook & Guidance

Looking ahead, Virtus plans to continue expanding its ETF and separate account offerings, with several new strategies in development. The company expects an average fee rate of 41-42 basis points and anticipates employment expenses at the higher end of the 49-51% range. These projections indicate a focus on growth and capital management.

Executive Commentary

CEO George Elward emphasized the importance of active management in volatile markets, stating, "The markets we’ve been experiencing... is the type of environment in which active managers can demonstrate their value." CFO Mike Angerthal highlighted the company’s financial flexibility, noting, "Our adequate levels of working capital and modest leverage provide financial flexibility to continue to invest in the business and return capital."

Risks and Challenges

• Continued market volatility may impact investor sentiment and asset flows.
• High employment expenses could pressure profit margins.
• The competitive landscape in asset management remains intense.
• Potential regulatory changes could affect operational strategies.

Q&A

During the earnings call, analysts inquired about the company’s capital allocation strategy and the impact of fee rate changes. The management addressed these concerns, highlighting their balanced approach to investing in growth while returning capital to shareholders. Additionally, discussions on the strategic direction of separate managed accounts (SMA) and potential tax reporting modifications were prominent.

Virtus Investment Partners faces a challenging environment but remains committed to strategic growth and capital management, with an eye on expanding its product offerings and maintaining competitive performance.

Full transcript - Virtus Investment Partners Inc (VRTS) Q1 2025:

Didi, Conference Operator: Good morning. My name is Didi, 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 speakers’ 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, Host/Investor Relations, Virtus Investment Partners: Thanks, Didi, 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 twenty twenty five. Our speakers today are George Elward, President and CEO, and Mike Angerthal, Chief Financial Officer. Following their prepared remarks, we’ll have

George Elward, President and CEO, Virtus Investment Partners: a Q and A period.

Sean Rourke, Host/Investor Relations, Virtus Investment Partners: 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 use certain non GAAP measures to evaluate our financial results. Our 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 Elward, President and CEO, Virtus Investment Partners: Thank you, Sean, and good morning, everyone. I’ll start today with an overview of the results we reported this morning, then give it over to Mike for more detail. Market performance volatility were challenging in the first quarter, leading to lower assets under management. And 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 the 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. 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 ten 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 ten year period. They also ranked 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 and filing that we expect to launch over the next few quarters, including our first interval fund.

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 $8,500,000,000 wealth management business, and are expanding resources to support that effort. Turning now to a review of the results. Total assets under management were $167,500,000,000 at March 31, down sequentially due to market performance and net outflows. Total sales of $6,200,000,000 compared with $6,400,000,000 in the fourth quarter, and were generally stable across products despite the mark the market disruption in March.

Total net outflows of 3,000,000,000 improved from 4,800,000,000.0 as the prior quarter included a large partial redemption. Reviewing by product, for institutional, net outflows of 1,200,000,000 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 SMICCAD core equity model offering late last year. Assets in that strategy had grown significantly, and it was soft close 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 1,100,000,000.0 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 $3,400,000,000 on continued strong positive net flows of 300,000,000.0 Over the past year, ETFs generated 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 US and non US 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 as 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 as adjusted increased 6%. Turning now to capital.

We continue to take a balanced approach for our capital management by investing in our growth, returning capital to shareholders, and maintaining appropriate levels of leverage. During the quarter, we used $26,000,000 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 $23,000,000 revenue participation payment, which reduced our contingent liability to $40,000,000 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. So with that, I’ll turn the call over to Mike. Mike?

Mike Angerthal, Chief Financial Officer, Virtus Investment Partners: 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 167,500,000,000.0 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 US retail mutual funds at 27%. The remaining 11% comprises closed end funds, global funds, and ETFs. We are also diversified within asset classes. Inequities between international and domestic and within domestic, well represented among mid, small, and large cap strategies. And 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, ’70 ’1 percent 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. And 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 $6,200,000,000 compared with $6,400,000,000 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 1,500,000,000.0 were relatively unchanged from 1,600,000,000.0 last quarter as higher fixed income sales, particularly emerging markets debt, were offset by lower alternatives and equity strategies. Retail separate account sales of 1,700,000,000.0 were also essentially unchanged from 1,800,000,000.0 in the prior quarter with lower SMID cap sales mostly offset by higher small cap, large cap, and fixed income. Open end fund sales of 3,000,000,000 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 400,000,000.0. We continue to prioritize new ETF capabilities and further availability through intermediaries. Total net outflows of 3,000,000,000 compared with 4,800,000,000.0 last quarter. Reviewing by product, institutional net outflows of 1,200,000,000.0 improved from 3,800,000,000.0 in the prior quarter. By strategy, within institutional, we have 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 700,000,000.0 largely related to the soft close of certain SMID cap equity model offerings late last year. For open end funds, net outflows of 1,100,000,000.0 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 point 3,000,000,000 of positive net flows. Turning to slide nine, investment management fees as adjusted of $178,500,000 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 to 42 basis points is reasonable for modeling purposes, with performance fees of 3 to 5,000,000 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 109,400,000.0 increased 5% sequentially, reflecting 10,000,000 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% to 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 $31,300,000 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 1,000,000 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 to 32,000,000, 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 54,600,000.0 declined from 74,500,000.0 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 500,000.0, 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 200,000.0. Net income as adjusted of $5.73 per diluted share, which included $1.01 of seasonal expenses compared with $7.5 in the fourth quarter and increased 6% over the prior year period. In terms of GAAP results, net income per share of $4.5 decreased from $4.66 per share in the fourth quarter and included 94¢ of realized and unrealized losses on investments, partially offset by 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 dividend, share repurchases, and net settlements.

Cash and equivalents at March 31 were 135,400,000.0. In addition, we had 143,000,000 of seed capital investments to support growth initiatives and 132,800,000.0 of other investments, primarily in our managed CLOs. Working capital was 137,200,000.0, up 2% from 134,500,000.0, 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 20,000,000 and net settled 35,178 shares for 6,100,000.0 to satisfy employee tax obligations. We also made a $23,100,000 revenue participation payment, reducing the contingent consideration liability by 36% to 40,400,000.0.

The majority of that liability will be paid next year in the first quarter. At March 31, gross debt to EBITDA was point seven times, unchanged from December 31, and we ended the quarter with 100,000,000 of net debt or point three 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. And finally, as I’ve previously noted, our intangible assets continue to provide a cash tax benefit, which is not included in our earnings per share as adjusted.

Net present value of the tax asset is approximately 112,000,000 or $16 on a per share basis. And with that, let me turn the call back over to George. George?

George Elward, President and CEO, Virtus Investment Partners: Thanks, Mike. So we will now take all of your questions. Evie, would you open up the lines, please?

Didi, Conference Operator: Thank And our first question comes from Ben Butish of Barclays. Your line is open.

Ben Butish, Analyst, Barclays: 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 between the range. Can you provide any more color on where things are kind of shaking out as we get into April? And then 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 is mix within the mix, but any additional color there would be helpful. Thank you.

Mike Angerthal, Chief Financial Officer, Virtus Investment Partners: Yeah, hey, Ben. As you know, the fee rate will be impacted by many factors, including the markets, fee rate differential on sales versus redemptions. But, you know, 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 to 55% range. But just currently, as we look ahead, I do think the range that we talked about is appropriate for modeling.

And if there are any updates to that, we’ll reflect that and communicate it accordingly.

Ben Butish, Analyst, Barclays: 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. Just 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 Elward, President and CEO, Virtus Investment Partners: Yeah, so I mean, as you commented, we always evaluate, you know, our alternative uses of capital every quarter. And one of the factors we do evaluate is, you know, our relative perspective on how our stock is trading. And as you correctly know, we did increase the amount of repurchases we did compared to prior quarters. So that will continue to be a factor as we sort of decide what the next repurchase levels will be. But you know, 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. And while we do invest in the business, we do think return of capital is critical. And again, we’re very cognizant of, you know, our perspective on how that stock is trading. So that absolutely will figure into how our decisions on what to do in the next few quarters.

Ben Butish, Analyst, Barclays: Understood, thanks for taking my questions.

George Elward, President and CEO, Virtus Investment Partners: Thank you.

Didi, Conference Operator: Thank you. And our next question comes from Bill Katz of TD Cowen. Your line is open.

Bill Katz, Analyst, TD Cowen: Great. Thanks very much. So just following 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 sort of size how big that vehicle is?

What percentage of the twenty twenty four flows that represents? And then as you look across your broader SMA platform, are there any other vehicles that might be facing some kind of capacity constraints?

George Elward, President and CEO, Virtus Investment Partners: Yeah, so for SMAs, that has been an area where we’ve consistently had growth over a period of time. And as we indicated, and one of the strategies that have been very successful, there was an appropriate soft closing of that. And that was coincident then obviously then with the challenges in the market in the first quarter, right? So 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. And in that case, we actually have very similar strategies that was the SMID cap core.

We have other very attractive strategies as well in the SMID and the mid cap. But again, we were trying to do that in quarter of

Mike Angerthal, Chief Financial Officer, Virtus Investment Partners: a little bit of volatility and uncertainty in terms

George Elward, President and CEO, Virtus Investment Partners: of how investors should behave. But 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. So, you know, 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 capacity.

Mike?

Mike Angerthal, Chief Financial Officer, Virtus Investment Partners: Yeah, I think we feel good about capacity and don’t have any specific capacity constraints on other areas in the retail channel. I think what we’ve been pleased with is moving up in the capitalization. We’ve seen mid cap, looking year over year on the sales in mid cap, they’re up meaningfully and we’ve been able to at other times increase larger capitalizations as we’ve soft closed other products, whether it’s small cap or now SMID cap. So we’ve seen and had success in moving up the capitalization and feel very good about mid cap, both on the core, specifically on the core side, and there is significant available capacity in that area. We do, expect that to be a contributor to growth going forward.

Bill Katz, Analyst, TD Cowen: Okay. And then just maybe a big picture question. I know we’ve chatted about this over the last couple of quarters. And I think usually when you make any kind of strategic change, it tends to be in the first quarter of the New Year. And just 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?

Mike Angerthal, Chief Financial Officer, Virtus Investment Partners: Yeah, I think you’re referring to the tax attributes in 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. And we 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. So we do continue to evaluate it.

It’s important to us to provide transparency because there is real value that we do achieve from those tax benefits. So we’ll continue to evaluate and ensure we think we’re providing the appropriate transparency to ensure investors prescribe the value that we know is there. And on a sort of adjusting it from an EPS basis, it does come out like $2.5 per year. So if you wanna just do the math that extends on a per share basis rather than thinking of it as an asset, it’s about $2.5 per share. But 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, Analyst, TD Cowen: Great. Thank you very much.

George Elward, President and CEO, Virtus Investment Partners: Thank

Didi, Conference Operator: Thank you. This concludes our question and answer session. I would now like to turn the conference back Alward.

George Elward, President and CEO, Virtus Investment Partners: Great. Well, thank you so much. And again, as always, I wanna thank everyone today for joining us and encourage you to reach out if you have any other further questions. Thank you.

Didi, Conference Operator: That concludes today’s call. Thank you for participating, and you may now disconnect.

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