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Invesco Lags on Q2 Earnings Miss

Zacks Equity Research

Second quarter adjusted earnings came in at 41 cents per share for Invesco Ltd. (IVZ) , marginally missing the Zacks Consensus Estimate of 43 cents. This also compares unfavorably with the adjusted earnings of 44 cents in the previous quarter.

Invesco’s lower-than-expected results were attributable to a drop in net revenue, partly offset by a marginal dip in operating expenses. Moreover, assets under management (:AUM) deteriorated slightly while the balance sheet position remained stable during the quarter.

On a GAAP basis, net income was $153.9 million or 34 cents per share, compared with $193.9 million or 43 cents in the prior quarter.

Behind the Headlines

Adjusted net revenue dipped 3.3% sequentially to $712.1 million. A significant drop in performance fees and other revenue were the primary reasons for the decline. Similarly, changes in the foreign exchange rate had an adverse impact on net revenue. Moreover, net revenue was also nowhere near the Zacks Consensus Estimate of $1.05 billion.

Adjusted operating expenses fell marginally by 0.9% from the prior quarter to $463.1 million. The decrease was mainly due to lower employee compensation expenses and increased marketing expenses, partially offset by higher general and administrative expenses.

Adjusted operating margin for the quarter was 35.0%, down from 36.6% in the prior quarter.

Assets under Management

As of June 30, 2012, AUM plummeted 3.9% sequentially to $646.6 billion, reflecting net market losses and adverse foreign exchange rate changes. Average AUM for the reported quarter was $651.2 billion, down 1.1% from $658.2 billion in the prior quarter.

Long-term net outflows during the quarter were $4.9 billion compared with long-term net inflows of $7.0 billion in the preceding quarter.

Balance Sheet

As of June 30, 2012, cash and cash equivalents were $718.4 million, compared with $727.4 million as of December 31, 2011. Total debt was $1,341.6 million as of June 30, 2012, against $1,284.7 million as of December 31, 2011.

Additionally, the credit facility balance was $811.0 million as of June 30, 2012, against $580.0 million as of March 31, 2012.

Furthermore, during the quarter, Invesco repaid the $215.1 million of outstanding 5.625% Senior Notes. This redemption was funded through the credit facility and existing cash balances.

Share Repurchase Update

During the reported quarter, Invesco repurchased $75 million worth of shares, representing 3.2 million shares at an average price of $23.30 per share. Hence, for the first half of the year, the company repurchased shares worth $150 million.

Dividend Update

Concurrent with the earnings release, the company declared a second-quarter dividend of 17.25 cents per share. The dividend will be paid on September 7 to shareholders of record as of August 22.

Peer Performances

Unlike Invesco, The Blackstone Group’s (BX) second quarter economic net income exceeded the Zacks Consensus Estimate. Better-than-expected results were aided by lower expenses, which were to some extent offset by a significant drop in the top line. Moreover, a robust improvement in AUM was also a positive.

T. Rowe Price Group Inc.’s (TROW) second quarter earnings were a penny below the Zacks Consensus Estimate. A higher-than-expected top-line growth was a positive for the quarter whereas elevated operating expenses were a negative.

Our Viewpoint

Invesco’s long-term investment performance was boosted by an uptrend in the global equity markets, which is also expected to lift the company’s operating results.  Moreover, the operating leverage is expected to improve significantly over the long term due to Invesco’s cost-control initiatives.

Invesco is well-positioned to benefit from improved global investment flows, resulting from its broad diversification. However, the volatile U.S. dollar and increasing competition remain major areas of concern.

Invesco currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. Considering the fundamentals, we also maintain an ‘Underperform’ recommendation on the stock.

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