Press Release

Pzena Investment Management, Inc. Reports Results for the Third Quarter of 2018

Company Release - 10/18/2018 4:15 PM ET
  • Assets under management ends the third quarter at $38.9 billion.

  • Q3 2018 revenue increases 9 percent to $39.6 million from Q3 2017.

  • Q3 2018 GAAP diluted earnings per share increases 29 percent to $0.22 from Q3 2017.

  • Board declares a quarterly dividend of $0.03 per share.

NEW YORK, Oct. 18, 2018 (GLOBE NEWSWIRE) -- Pzena Investment Management, Inc. (NYSE: PZN) reported the following U.S. Generally Accepted Accounting Principles (GAAP) basic and diluted net income and earnings per share for the three and nine months ended September 30, 2018 and 2017 (in thousands, except per-share amounts):

    
  GAAP Basis 
  For the Three Months Ended
September 30,
 
  2018  2017 
  (unaudited) 
Basic Net Income $4,262  $2,989 
Basic Earnings Per Share $0.24  $0.17 
         
Diluted Net Income $15,786  $11,862 
Diluted Earnings Per Share $0.22  $0.17 
         
  GAAP Basis 
  For the Nine Months Ended
September 30,
 
  2018  2017 
  (unaudited) 
Basic Net Income $11,257  $7,954 
Basic Earnings Per Share $0.63  $0.46 
         
Diluted Net Income $44,033  $31,077 
Diluted Earnings Per Share $0.61  $0.44 
         

GAAP diluted net income and GAAP diluted earnings per share were $15.8 million and $0.22 respectively, for the three months ended September 30, 2018, and $11.9 million and $0.17, respectively, for the three months ended September 30, 2017. GAAP diluted net income and GAAP diluted earnings per share were $44.0 million and $0.61, respectively, for the nine months ended September 30, 2018, and $31.1 million and $0.44, respectively, for the nine months ended September 30, 2017.

In evaluating the results of operations, management also reviews non-GAAP measures of earnings, which are adjusted to exclude accounting items that add a measure of non-operational complexity which obscures the underlying performance of the business. For the three and nine months ended September 30, 2018 and 2017, no adjustments were made to GAAP earnings, resulting in the same GAAP and non-GAAP measures of earnings. 

Net income for diluted earnings per share generally assume all operating company membership units are converted into Company stock at the beginning of the reporting period, and the resulting change to Company net income associated with its increased interest in the operating company is taxed at the Company's effective tax rate, exclusive of the adjustments noted above and other adjustments.  When this conversion results in an increase in earnings per share or a decrease in loss per share, diluted net income and diluted earnings per share are assumed to be equal to basic net income and basic earnings per share for the reporting period.

In December 2017, the Company changed the classification of assets under management ("AUM") to better reflect the composition of its client base. The Company now groups its assets into three categories: Separately Managed Accounts, Sub-Advised Accounts, and Pzena Funds, which better illustrate the characteristics inherent in its client relationships. Historical data has been reclassified for all periods presented and did not impact reported totals of AUM.

                     
Assets Under Management
(unaudited)
1
                    
($ billions)                    
  For the Three Months Ended  For the Twelve Months Ended 
  September 30,  June 30,  September 30,  September 30,  September 30, 
  2018  2018  2017  2018  2017 
Separately Managed Accounts                    
Assets                    
Beginning of Period $13.8  $14.6  $13.8  $14.3  $11.5 
Inflows  0.8   0.3   0.1   1.8   1.5 
Outflows  (0.3)  (0.8)  (0.3)  (2.2)  (1.5)
Net Flows  0.5   (0.5)  (0.2)  (0.4)   
Market Appreciation/(Depreciation)  0.3   (0.3)  0.7   0.7   2.8 
End of Period $14.6  $13.8  $14.3  $14.6  $14.3 
                     
Sub-Advised Accounts                    
Assets                    
Beginning of Period Assets $21.2  $21.3  $18.2  $19.7  $14.8 
Inflows  1.0   0.7   0.8   3.7   3.3 
Outflows  (0.5)  (0.5)  (0.3)  (2.4)  (2.2)
Net Flows  0.5   0.2   0.5   1.3   1.1 
Market Appreciation/(Depreciation)  0.5   (0.3)  1.0   1.2   3.8 
End of Period $22.2  $21.2  $19.7  $22.2  $19.7 
                     
Pzena Funds                    
Assets                    
Beginning of Period Assets $1.9  $1.8  $1.5  $1.4  $1.1 
Inflows  0.2   0.2      0.9   0.3 
Outflows  (0.1)  (0.1)  (0.1)  (0.2)  (0.3)
Net Flows  0.1   0.1   (0.1)  0.7    
Market Appreciation/(Depreciation)  0.1            0.3 
End of Period $2.1  $1.9  $1.4  $2.1  $1.4 
                     
Total                    
Assets                    
Beginning of Period $36.9  $37.7  $33.5  $35.4  $27.4 
Inflows  2.0   1.2   0.9   6.4   5.1 
Outflows  (0.9)  (1.4)  (0.7)  (4.8)  (4.0)
Net Flows  1.1   (0.2)  0.2   1.6   1.1 
Market Appreciation/(Depreciation)  0.9   (0.6)  1.7   1.9   6.9 
End of Period $38.9  $36.9  $35.4  $38.9  $35.4 
                     

Financial Discussion

             
Revenue (unaudited)            
($ thousands)            
  For the Three Months Ended 
  September 30,  June 30,  September 30, 
  2018  2018  2017 
Separately Managed Accounts $19,578  $19,160  $19,756 
Sub-Advised Accounts  16,616   16,256   14,073 
Pzena Funds  3,386   2,932   2,400 
Total $39,580  $38,348  $36,229 
             
      For the Nine Months Ended 
      September 30,  September 30, 
      2018  2017 
Separately Managed Accounts     $58,820  $56,003 
Sub-Advised Accounts      49,323   39,437 
Pzena Funds      9,037   6,946 
Total     $117,180  $102,386 
             

Revenue was $39.6 million for the third quarter of 2018, an increase of 3.2% from $38.3 million for the second quarter of 2018 and an increase of 9.2% from $36.2 million for the third quarter of 2017. 

Included in these amounts for the third quarter of 2018 were performance fees recognized of $0.8 million, compared to $0.9 million for both the second quarter of 2018 and for the third quarter of 2017.

Average assets under management for the third quarter of 2018 were $38.3 billion, increasing 1.6% from $37.7 billion for the second quarter of 2018, and 11.3% from $34.4 billion for the third quarter of 2017.  The increase from the second quarter of 2018 primarily reflects net inflows and market appreciation during the third quarter of 2018.  The increase from the third quarter of 2017 primarily reflects market appreciation and net inflows.

The weighted average fee rate was 0.413% for the third quarter of 2018, increasing from 0.407% for the second quarter of 2018, and decreasing from 0.421% for the third quarter of 2017. 

The weighted average fee rate for separately managed accounts was 0.547% for the third quarter of 2018, increasing from 0.535% for the second quarter of 2018, and decreasing from 0.563% for the third quarter of 2017.  The increase from second quarter of 2018 reflects an increase in assets in strategies that generally carry higher fee rates. The decrease from the third quarter of 2017 reflects a decrease in performance fees and an increase in large client relationships that generally carry lower fee rates.

The weighted average fee rate for sub-advised accounts was 0.302% for the third quarter of 2018, compared to 0.303% for the second quarter of 2018 and 0.298% for the third quarter of 2017.  

The weighted average fee rate for Pzena funds was 0.668% for the third quarter of 2018, increasing from 0.624% for the second quarter of 2018, and from 0.660% for the third quarter of 2017. The increase from the second quarter of 2018 and the third quarter of 2017 reflects an increase in assets in strategies that generally carry higher fee rates. The increase from the third quarter of 2017 is partially offset by the adoption of the new revenue recognition standard, which requires fund expense cap reimbursements to be presented net against revenue. The Company adopted the new revenue recognition standard as of January 1, 2018 using a modified retrospective approach, and thus prior periods have not been restated. Excluding the impact of the revenue recognition presentation change, the weighted average fee rate for Pzena funds was 0.703% for the third quarter of 2018, increasing from 0.676% for the second quarter of 2018 and from 0.660% for the third quarter of 2017. 

Total operating expenses were $19.4 million for the third quarter of 2018, increasing from $18.6 million for the second quarter of 2018 and from $17.8 million for the third quarter of 2017.  The increase in operating expenses from the second quarter of 2018 primarily reflects an increase in compensation and benefits expense due to an increase in compensation rates. The increase in operating expenses from the third quarter of 2017 reflects an increase in compensation and benefits expense due to an increase in compensation rates, as well as an increase in general and administrative costs due to an increase in business activities.

             
Operating Expenses (unaudited)            
($ thousands)            
  For the Three Months Ended 
  September 30,  June 30,  September 30, 
  2018  2018  2017 
Compensation and Benefits Expense $16,122  $15,224  $14,763 
General and Administrative Expense  3,322   3,379   3,062 
Operating Expenses $19,444  $18,603  $17,825 
             
      For the Nine Months Ended 
      September 30,  September 30, 
      2018  2017 
Compensation and Benefits Expense     $47,520  $44,681 
General and Administrative Expense      9,856   9,585 
Operating Expenses     $57,376  $54,266 
             

As of September 30, 2018, employee headcount was 109, up from 108 at June 30, 2018 and 108 at September 30, 2017. 

The operating margin was 50.9% for the third quarter of 2018, compared to 51.5% for the second quarter of 2018, and 50.8% for the third quarter of 2017.

Other income/ (expense) was income of approximately $0.6 million for the third quarter of 2018, an expense of $0.2 million for the second quarter of 2018, and income $1.3 million for the third quarter of 2017.  Other income/ (expense) includes a portion of gains/ (losses) and other investment income associated with the investments of outside interests, which are offset in net income attributable to non-controlling interests.

Excluding the outside interests of the Company's investment partnerships, other income/ (expense) was income of approximately $0.6 million for the third quarter of 2018, an expense of $0.2 million for second quarter of 2018, and income of $1.1 million for the third quarter of 2017.  Other income/ (expense) primarily reflects the fluctuations in the gains/ (losses) and other investment income recognized by the Company on its direct equity investments, the majority of which are held to satisfy obligations under its deferred compensation plan, as well as those recognized by external investors on their investments in investment partnerships that the Company consolidates.  Details of other income/ (expense), as well as a reconciliation of the related GAAP and non-GAAP measures, are shown below:

             
Other Income/ (Expense) (unaudited)            
($ thousands)            
  For the Three Months Ended 
  September 30,  June 30,  September 30, 
  2018  2018  2017 
Net Interest and Dividend Income $286  $125  $183 
Gains/ (Losses) and Other Investment Income  346   (327)  1,054 
Other (Expense)/ Income  (27)  (10)  69 
GAAP Other Income/ (Expense)  605   (212)  1,306 
Outside Interests of Investment Partnerships1  (16)  33   (215)
Non-GAAP Other Income/ (Expense), Net of Outside Interests $589  $(179) $1,091 
             
      For the Nine Months Ended 
      September 30,  September 30, 
      2018  2017 
Net Interest and Dividend Income     $509  $401 
(Losses)/ Gains and Other Investment Income      (144)  2,802 
Other (Expense)/ Income      (22)  201 
GAAP Other Income      343   3,404 
Outside Interests of Investment Partnerships1      (13)  (592)
Non-GAAP Other Income, Net of Outside Interests     $330  $2,812 
             

1          Represents the non-controlling interest allocation of the income of the Company's consolidated investment partnerships to its external investors.

The Company recognized income tax expenses of $1.3 million for the third quarter of 2018, $2.2 million for the second quarter of 2018, and $2.5 million for the third quarter of 2017.  Third quarter 2018 income tax expense reflects a $0.5 million benefit associated with the reversal of uncertain tax position liabilities and interest related to unincorporated and other business tax expenses due to the expiration of the statute of limitations. The decrease in income tax expenses from the second quarter of 2018 and third quarter of 2017 also reflects a corporate income tax benefit recognized during the third quarter of 2018 associated with a one-time adjustment to the deferred tax asset.

Details of the income tax expense, as well as a reconciliation of the related GAAP and non-GAAP measures, are shown below: 

             
Income Tax Expense (unaudited)            
($ thousands)            
  For the Three Months Ended 
  September 30,  June 30,  September 30, 
  2018  2018  2017 
Corporate Income Tax Expense $867  $1,338  $1,746 
Unincorporated and Other Business Tax Expense  427   838   747 
Income Tax Expense $1,294  $2,176  $2,493 
             
      For the Nine Months Ended 
      September 30,  September 30, 
      2018  2017 
Corporate Income Tax Expense     $3,674  $4,413 
Unincorporated and Other Business Tax Expense      2,003   2,047 
Income Tax Expense     $5,677  $6,460 
             

Details of the net income attributable to non-controlling interests of the Company's operating company and consolidated subsidiaries are shown below:

             
GAAP Non-Controlling Interests (unaudited)            
($ thousands)            
  For the Three Months Ended 
  September 30,  June 30,  September 30, 
  2018  2018  2017 
Operating Company Allocation $15,169  $13,918  $14,013 
Outside Interests of Investment Partnerships1  16   (33)  215 
GAAP Net Income Attributable to Non-Controlling Interests $15,185  $13,885  $14,228 
             
      For the Nine Months Ended 
      September 30,  September 30, 
      2018  2017 
Operating Company Allocation     $43,200  $36,518 
Outside Interests of Investment Partnerships1      13   592 
GAAP Net Income Attributable to Non-Controlling Interests     $43,213  $37,110 
             

1          Represents the non-controlling interest allocation of the income of the Company's consolidated investment partnerships to its external investors.

On October 16, 2018, the Company's Board of Directors approved a quarterly dividend of $0.03 per share of its Class A common stock.  The following dates apply to the dividend:

Record Date:       October 30, 2018

Payment Date:     November 23, 2018

During the last twelve months, inclusive of the dividend noted above, the Company declared total dividends of $0.51 per share of its Class A common stock.

Third Quarter 2018 Earnings Call Information

Pzena Investment Management, Inc. (NYSE: PZN) will hold a conference call to discuss the Company's financial results and outlook at 10:00 a.m. ET, Friday, October 19, 2018.  The call will be open to the public.

Webcast Instructions: To gain access to the webcast, which will be "listen-only," go to the Events page in the Investor Relations area of the Company's website, www.pzena.com.

Teleconference Instructions: To gain access to the conference call via telephone, U.S. callers should dial 844-378-6482; Canada callers should dial 855-669-9657; international callers should dial 412-317-5106.  Please reference the Pzena Investment Management call.

Replay: The conference call will be available for replay through November 2, 2018, on the web using the information given above.

About Pzena Investment Management

Pzena Investment Management, LLC, the firm's operating company, is a value-oriented investment management firm.  Founded in 1995, Pzena Investment Management has built a diverse, global client base.  More firm and stock information is posted at www.pzena.com.

Forward-Looking Statements

This press release may contain, in addition to historical information, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. Forward-looking statements provide the Company’s current views, expectations, or forecasts of future events and performance, and include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. Words or phrases such as “anticipate,” “believe,” “continue,” “ongoing,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project” or similar words or phrases, or the negatives of those words or phrases, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking.

Among the factors that could cause actual results to differ from those expressed or implied by a forward-looking statement are those described in the sections entitled “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations” in the Company's Annual Report on Form 10-K, as filed with the SEC on March 9, 2018 and in the Company's Quarterly Reports on Form 10-Q as filed with the SEC.  In light of these risks, uncertainties, assumptions, and factors, actual results could differ materially from those expressed or implied in the forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date stated, or if no date is stated, as of the date of this release.

The Company is not under any obligation and does not intend to make publicly available any update or other revisions to any forward-looking statements to reflect circumstances existing after the date of this release or to reflect the occurrence of future events even if experience or future events make it clear that any expected results expressed or implied by those forward-looking statements will not be realized.

Contact: Gary Bachman, 212-583-0225 or bachman@pzena.com.

PZENA INVESTMENT MANAGEMENT, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands)

    
  As of 
  September 30,  December 31, 
  2018  2017 
  (unaudited)     
ASSETS        
Cash and Cash Equivalents $31,913  $63,414 
Restricted Cash  1,026   1,017 
Due from Broker  894   1,875 
Advisory Fees Receivable  34,398   32,531 
Investments  58,170   21,737 
Prepaid Expenses and Other Assets  2,353   2,575 
Deferred Tax Asset  35,984   39,639 
Property and Equipment, Net of Accumulated        
Depreciation of $3,804 and $3,063, respectively  5,631   6,259 
TOTAL ASSETS $170,369  $169,047 
         
LIABILITIES AND EQUITY        
Liabilities:        
Accounts Payable and Accrued Expenses $31,962  $31,983 
Due to Broker  608   144 
Liability to Selling and Converting Shareholders  36,441   36,441 
Deferred Compensation Liability  3,490   918 
Other Liabilities  415   272 
TOTAL LIABILITIES  72,916   69,758 
         
Equity:        
Total Pzena Investment Management, Inc.'s Equity  29,417   32,304 
Non-Controlling Interests  68,036   66,985 
TOTAL EQUITY  97,453   99,289 
TOTAL LIABILITIES AND EQUITY $170,369  $169,047 
         

PZENA INVESTMENT MANAGEMENT, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per-share amounts)

       
  For the Three Months Ended  For the Nine Months Ended 
  September 30,  September 30, 
  2018  2017  2018  2017 
REVENUE $39,580  $36,229  $117,180  $102,386 
                 
EXPENSES                
Compensation and Benefits Expense  16,122   14,763   47,520   44,681 
General and Administrative Expense  3,322   3,062   9,856   9,585 
TOTAL OPERATING EXPENSES  19,444   17,825   57,376   54,266 
Operating Income  20,136   18,404   59,804   48,120 
                 
Other Income  605   1,306   343   3,404 
                 
Income Before Taxes  20,741   19,710   60,147   51,524 
                 
Income Tax Expense  1,294   2,493   5,677   6,460 
Consolidated Net Income  19,447   17,217   54,470   45,064 
                 
Less: Net Income Attributable to Non-Controlling Interests  15,185   14,228   43,213   37,110 
                 
Net Income Attributable to Pzena Investment Management, Inc. $4,262  $2,989  $11,257  $7,954 
                 
Earnings per Share - Basic and Diluted Attributable to Pzena Investment Management, Inc. Common Stockholders:                
                 
Net Income for Basic Earnings per Share $4,262  $2,989  $11,257  $7,954 
Basic Earnings per Share $0.24  $0.17  $0.63  $0.46 
Basic Weighted Average Shares Outstanding  17,489,380   17,285,307   17,752,788   17,319,948 
                 
Net Income for Diluted Earnings per Share $15,786  $11,862  $44,033  $31,077 
Diluted Earnings per Share $0.22  $0.17  $0.61  $0.44 
Diluted Weighted Average Shares Outstanding  71,677,806   70,763,213   71,934,411   70,845,892 
                 

A PDF accompanying this announcement is available at http://resource.globenewswire.com/Resource/Download/9ed82a9c-77da-4e09-a576-8c9d314f1d95

pzena.jpg

Source: Pzena Investment Management Inc