Artisan Partners(APAM) - 2024 Q3 - Quarterly Results

Company Overview and Strategic Highlights Artisan Partners' CEO highlights long-term value creation and strategic evolution towards fixed income and private assets, supported by strong financial performance and AUM growth CEO's Strategic Commentary CEO Eric Colson emphasized long-term value creation and strategic evolution towards fixed income, alternatives, and private assets due to a shrinking public equity market - Since its IPO in 2013, Artisan Partners has returned $36.47 per share in cumulative dividends and delivered an annual total shareholder return of 12.38%, outperforming the S&P 500 (12.05%) and Russell 2000 (7.80%)[1] - Early strategies (1995-2002) represent nearly $79 billion of AUM, delivering average annual absolute returns of 10.66% and alpha of 289 basis points[2] - Strategies launched between 2005-2011 (global equities) represent nearly $59 billion of AUM, with average annual absolute returns of 8.63% and alpha of 142 basis points[3] - The latest growth phase focuses on fixed income, alternatives, and private assets, driven by a shrinking public equity opportunity set (U.S. public companies declined over 40% since 1996 peak)[4][5][8] - Over the last five years, the company launched eight new strategies (five credit-oriented or alternative), returning $16.94 per share in cumulative dividends and delivering an annual total shareholder return of 18.56%, outperforming the S&P 500 (14.11%) and Russell 2000 (7.91%)[9] Key Financial and AUM Summary Artisan Partners reported strong financial results for 3Q24 and 9M24, with significant increases in Assets Under Management (AUM), revenues, and net income across both GAAP and adjusted measures. AUM reached $167.8 billion by September 30, 2024, driven by market appreciation Consolidated Financial Results (GAAP & Adjusted) - Key Metrics (millions, except AUM in billions) | Metric | Sep 30, 2024 (3M) | Jun 30, 2024 (3M) | Sep 30, 2023 (3M) | Sep 30, 2024 (9M) | Sep 30, 2023 (9M) | | :-------------------------------------------------------- | :---------------- | :---------------- | :---------------- | :---------------- | :---------------- | | Assets Under Management (billions) | | | | | | | Ending AUM | $167.8 | $158.9 | $136.5 | $167.8 | $136.5 | | Average AUM | $162.8 | $158.6 | $142.2 | $158.5 | $139.0 | | Revenues (millions) | $279.6 | $270.8 | $248.7 | $814.8 | $726.1 | | Operating Income (millions) | | | | | | | GAAP Operating Income | $93.2 | $86.6 | $82.2 | $257.5 | $227.2 | | GAAP Operating Margin | 33.3% | 32.0% | 33.0% | 31.6% | 31.3% | | Adjusted Operating Income | $97.8 | $87.3 | $80.9 | $266.7 | $228.4 | | Adjusted Operating Margin | 35.0% | 32.2% | 32.5% | 32.7% | 31.5% | | Net Income Attributable to APAM (millions) | | | | | | | GAAP Net Income | $72.9 | $57.6 | $53.1 | $190.0 | $157.5 | | Basic EPS | $1.03 | $0.80 | $0.76 | $2.68 | $2.27 | | Diluted EPS | $1.03 | $0.80 | $0.76 | $2.68 | $2.27 | | Adjusted Net Income | $74.5 | $66.0 | $60.8 | $202.1 | $170.3 | | Adjusted Net Income per Adjusted Share | $0.92 | $0.82 | $0.75 | $2.50 | $2.11 | | Adjusted EBITDA (millions) | $103.6 | $92.3 | $85.5 | $282.2 | $239.6 | Quarterly Financial Performance (3Q24) Artisan Partners' Q3 2024 performance showed sequential and year-over-year growth in AUM, revenues, and net income, driven by market appreciation and improved operating margins Comparison: 3Q24 vs. 2Q24 In Q3 2024, Artisan Partners saw AUM increase by 6% sequentially, primarily due to market appreciation. Revenues grew by 3%, while operating expenses increased by 1% due to higher long-term incentive compensation. Both GAAP and adjusted operating margins improved, and net income and EPS significantly increased 3Q24 vs. 2Q24 Key Financial Changes (millions, except AUM in billions) | Metric | 3Q24 (millions) | 2Q24 (millions) | Change (millions) | % Change | | :------------------------------------ | :-------------- | :-------------- | :---------------- | :------- | | Ending AUM (billions) | $167.8 | $158.9 | $8.9 | 6% | | Average AUM (billions) | $162.8 | $158.6 | $4.2 | 3% | | Revenues | $279.6 | $270.8 | $8.8 | 3% | | Operating Expenses | $186.4 | $184.2 | $2.2 | 1% | | GAAP Operating Margin | 33.3% | 32.0% | 1.3 pp | | | Adjusted Operating Margin | 35.0% | 32.2% | 2.8 pp | | | Total Investment Gains | $35.5 | $3.5 | $32.0 | 914% | | APAM's Investment Gains | $18.2 | $0.8 | $17.4 | 2175% | | GAAP Net Income | $72.9 | $57.6 | $15.3 | 27% | | GAAP Basic/Diluted EPS | $1.03 | $0.80 | $0.23 | 29% | | Adjusted Net Income | $74.5 | $66.0 | $8.5 | 13% | | Adjusted Net Income per Adjusted Share| $0.92 | $0.82 | $0.10 | 12% | - AUM increase was primarily driven by $9.9 billion of market appreciation, partially offset by $0.8 billion of net client cash outflows and $0.2 billion of Artisan Funds' distributions not reinvested[11] - Operating expense increase was primarily due to a $3.0 million increase in long-term incentive compensation, mainly driven by market valuation changes[11] Comparison: 3Q24 vs. 3Q23 Artisan Partners demonstrated strong year-over-year growth in Q3 2024, with AUM increasing by 23% and revenues by 12%. Operating expenses also rose by 12%, mainly due to higher incentive and long-term incentive compensation. Both GAAP and adjusted operating margins improved, leading to a substantial increase in net income and EPS 3Q24 vs. 3Q23 Key Financial Changes (millions, except AUM in billions) | Metric | 3Q24 (millions) | 3Q23 (millions) | Change (millions) | % Change | | :------------------------------------ | :-------------- | :-------------- | :---------------- | :------- | | Ending AUM (billions) | $167.8 | $136.5 | $31.3 | 23% | | Average AUM (billions) | $162.8 | $142.2 | $20.6 | 14% | | Revenues | $279.6 | $248.7 | $30.9 | 12% | | Operating Expenses | $186.4 | $166.5 | $19.9 | 12% | | GAAP Operating Margin | 33.3% | 33.0% | 0.3 pp | | | Adjusted Operating Margin | 35.0% | 32.5% | 2.5 pp | | | Total Investment Gains | $35.5 | $5.5 | $30.0 | 545% | | APAM's Investment Gains (Losses) | $18.2 | ($3.6) | $21.8 | NM | | GAAP Net Income | $72.9 | $53.1 | $19.8 | 37% | | GAAP Basic/Diluted EPS | $1.03 | $0.76 | $0.27 | 36% | | Adjusted Net Income | $74.5 | $60.8 | $13.7 | 23% | | Adjusted Net Income per Adjusted Share| $0.92 | $0.75 | $0.17 | 23% | - AUM increase was primarily due to $35.5 billion of investment returns, partially offset by $3.3 billion of net client cash outflows and $0.9 billion of Artisan Funds' distributions not reinvested[12] - Operating expense increase was primarily due to an $8.4 million increase in incentive compensation (driven by higher revenues) and an $8.0 million increase in long-term incentive compensation costs[13] Year-to-Date Financial Performance (9M24) Year-to-date performance for 9M24 showed significant AUM and revenue growth, alongside increased operating expenses, resulting in improved net income and EPS Comparison: 9M24 vs. 9M23 For the nine months ended September 30, 2024, Artisan Partners reported a 23% increase in AUM and a 12% rise in revenues compared to the prior year period. Operating expenses also increased by 12%, mainly due to higher compensation and benefits. Both GAAP and adjusted operating margins improved, contributing to a significant increase in net income and EPS 9M24 vs. 9M23 Key Financial Changes (millions, except AUM in billions) | Metric | 9M24 (millions) | 9M23 (millions) | Change (millions) | % Change | | :------------------------------------ | :-------------- | :-------------- | :---------------- | :------- | | Ending AUM (billions) | $167.8 | $136.5 | $31.3 | 23% | | Average AUM (billions) | $158.5 | $139.0 | $19.5 | 14% | | Revenues | $814.8 | $726.1 | $88.7 | 12% | | Operating Expenses | $557.3 | $498.9 | $58.4 | 12% | | GAAP Operating Margin | 31.6% | 31.3% | 0.3 pp | | | Adjusted Operating Margin | 32.7% | 31.5% | 1.2 pp | | | Total Investment Gains | $70.3 | $45.7 | $24.6 | 54% | | APAM's Investment Gains | $35.5 | $19.2 | $16.3 | 85% | | GAAP Net Income | $190.0 | $157.5 | $32.5 | 21% | | GAAP Basic/Diluted EPS | $2.68 | $2.27 | $0.41 | 18% | | Adjusted Net Income | $202.1 | $170.3 | $31.8 | 19% | | Adjusted Net Income per Adjusted Share| $2.50 | $2.11 | $0.39 | 18% | - Operating expense increase was primarily due to a $53.1 million increase in compensation and benefits, including a $29.9 million increase in incentive compensation and a $16.1 million increase in long-term incentive compensation[17] - APAM's portion of investment gains for the nine months ended September 30, 2024, was comprised of $19.8 million from hedging compensation plans and $15.7 million from seed investments[18] Capital Management and Dividends The company's balance sheet shows increased cash and equity with stable borrowings, supporting a consistent dividend policy of approximately 80% of cash generated Balance Sheet Overview Artisan Partners' balance sheet shows a significant increase in cash and cash equivalents to $253.9 million at September 30, 2024, from $141.0 million at December 31, 2023. Total stockholders' equity also grew to $405.0 million, while borrowings remained stable at $200.0 million, resulting in a low debt leverage ratio of 0.5x Balance Sheet Highlights (millions) | Metric | Sep 30, 2024 (millions) | Dec 31, 2023 (millions) | | :-------------------------- | :---------------------- | :---------------------- | | Cash and cash equivalents | $253.9 | $141.0 | | Total borrowings | $200.0 | $200.0 | | Total stockholders' equity | $405.0 | $351.4 | | Class A common shares outstanding | 70.1 million | N/A | | Debt leverage ratio | 0.5x | N/A | - During the September 2024 quarter, limited partners exchanged 176,213 common units for Class A common shares, increasing the Company's public float by 0.3%[20] Dividend Declaration and Policy Artisan Partners declared a variable quarterly dividend of $0.82 per share for the September 2024 quarter, representing approximately 80% of the cash generated. The company expects to continue paying a quarterly dividend of approximately 80% of cash generated, with a potential special dividend at year-end - A variable quarterly dividend of $0.82 per share of Class A common stock was declared for the September 2024 quarter[22] - The dividend represents approximately 80% of the cash generated in the September 2024 quarter[22] - The company expects to pay a quarterly dividend of approximately 80% of the cash generated each quarter, with a potential special dividend after year-end[22] Non-GAAP Financial Measures This section explains Artisan Partners' non-GAAP adjusted financial measures, which exclude specific items to provide a clearer view of operational profitability and efficiency Explanation and Reconciliation Artisan Partners uses non-GAAP 'adjusted' measures (Adjusted net income, Adjusted net income per adjusted share, Adjusted operating income, Adjusted operating margin, and Adjusted EBITDA) to evaluate profitability and efficiency, removing impacts from tax receivable agreements, market valuation changes in compensation plans, and net investment gains/losses. These adjustments also account for noncontrolling interests and assume full vesting/exchange of partnership units for a clearer operational view - Adjusted measures remove the impact of (1) net gain (loss) on tax receivable agreements, (2) compensation expense (reversal) related to market valuation changes in compensation plans, and (3) net investment gain (loss) of investment products[30][31] - Adjusted net income assumes full vesting of unvested Class A share-based awards and exchange of all outstanding limited partnership units for Class A common stock, treating all income of Artisan Partners Holdings as allocated to APAM[31] - The adjusted tax rate was 24.7% for all periods presented[31] Reconciliation of GAAP to Adjusted Net Income (millions) | Metric | Sep 30, 2024 (3M) | Jun 30, 2024 (3M) | Sep 30, 2023 (3M) | Sep 30, 2024 (9M) | Sep 30, 2023 (9M) | | :-------------------------------------------------------------------------------------------------- | :---------------- | :---------------- | :---------------- | :---------------- | :---------------- | | Net income attributable to Artisan Partners Asset Management Inc. (GAAP) | $72.9 | $57.6 | $53.1 | $190.0 | $157.5 | | Add back: Net income attributable to noncontrolling interests - Artisan Partners Holdings LP | 14.5 | 11.5 | 11.3 | 38.9 | 35.5 | | Add back: Provision for income taxes | 24.6 | 18.7 | 14.6 | 65.3 | 51.7 | | Add back: Compensation expense (reversal) related to market valuation changes in compensation plans | 4.6 | 0.7 | (1.3) | 9.2 | 1.2 | | Add back: Net (gain) loss on the tax receivable agreements | 0.5 | — | (0.5) | 0.5 | (0.5) | | Add back: Net investment (gain) loss of investment products attributable to APAM | (18.2) | (0.8) | 3.6 | (35.5) | (19.2) | | Less: Adjusted provision for income taxes | 24.4 | 21.7 | 20.0 | 66.3 | 55.9 | | Adjusted net income (Non-GAAP) | $74.5 | $66.0 | $60.8 | $202.1 | $170.3 | Exhibits: Detailed Financials This section provides detailed consolidated financial statements, including statements of operations and financial condition, for the reported periods Consolidated Statements of Operations The Consolidated Statements of Operations detail Artisan Partners' revenues, operating expenses, and net income for the three and nine months ended September 30, 2024 and 2023. Management fees constitute the vast majority of revenues, while compensation and benefits are the largest operating expense. Non-operating income includes significant net investment gains Consolidated Statements of Operations (Selected Data, millions) | Metric | Sep 30, 2024 (3M) | Jun 30, 2024 (3M) | Sep 30, 2023 (3M) | Sep 30, 2024 (9M) | Sep 30, 2023 (9M) | | :------------------------------------------------------------------ | :---------------- | :---------------- | :---------------- | :---------------- | :---------------- | | Management fees - Artisan Funds & Artisan Global Funds | $174.7 | $170.2 | $156.4 | $510.4 | $452.6 | | Management fees - Separate accounts and other | $104.9 | $100.5 | $92.2 | $304.3 | $273.3 | | Total revenues | $279.6 | $270.8 | $248.7 | $814.8 | $726.1 | | Compensation and benefits | $149.0 | $146.8 | $130.7 | $445.7 | $392.6 | | Total operating expenses | $186.4 | $184.2 | $166.5 | $557.3 | $498.9 | | Operating income | $93.2 | $86.6 | $82.2 | $257.5 | $227.2 | | Total non-operating income (expense) | $35.5 | $3.4 | $5.8 | $69.9 | $43.5 | | Income before income taxes | $128.7 | $90.0 | $88.0 | $327.4 | $270.7 | | Net income attributable to Artisan Partners Asset Management Inc. | $72.9 | $57.6 | $53.1 | $190.0 | $157.5 | | Basic earnings per share - Class A common shares | $1.03 | $0.80 | $0.76 | $2.68 | $2.27 | | Diluted earnings per share - Class A common shares | $1.03 | $0.80 | $0.76 | $2.68 | $2.27 | Condensed Consolidated Statements of Financial Condition The Condensed Consolidated Statements of Financial Condition show Artisan Partners' financial position as of September 30, 2024, compared to December 31, 2023. Key changes include a substantial increase in cash and cash equivalents and total stockholders' equity, while total liabilities also increased Condensed Consolidated Statements of Financial Condition (millions) | Metric | Sep 30, 2024 | Dec 31, 2023 | | :------------------------------------------------------------------ | :----------- | :----------- | | Assets | | | | Cash and cash equivalents | $253.9 | $141.0 | | Accounts receivable | $110.0 | $101.2 | | Investment securities | $211.9 | $150.5 | | Assets of consolidated investment products | $419.5 | $436.5 | | Total assets | $1,610.6 | $1,405.9 | | Liabilities and equity | | | | Accounts payable, accrued expenses, and other | $193.2 | $77.7 | | Borrowings | $199.4 | $199.3 | | Amounts payable under tax receivable agreements | $341.4 | $364.0 | | Liabilities of consolidated investment products | $66.9 | $47.7 | | Total liabilities | $906.6 | $802.1 | | Redeemable noncontrolling interests | $299.0 | $252.4 | | Total stockholders' equity | $405.0 | $351.4 | | Total liabilities, redeemable noncontrolling interests and stockholders' equity | $1,610.6 | $1,405.9 | Exhibits: Assets Under Management (AUM) Breakdown This section details Artisan Partners' Assets Under Management, including changes, client flows, and breakdowns by investment team, vehicle, and strategy performance AUM Changes and Flows Artisan Partners' AUM increased significantly to $167.8 billion by September 30, 2024, primarily driven by strong investment returns. While gross client cash inflows were substantial, they were largely offset by outflows, resulting in net client cash outflows for both the quarter and the nine-month period AUM Changes for Three Months Ended September 30, 2024 (millions) | Metric | Sep 30, 2024 | Jun 30, 2024 | Sep 30, 2023 | | :-------------------------------------- | :----------- | :----------- | :----------- | | Beginning assets under management | $158,887 | $160,384 | $142,989 | | Gross client cash inflows | $6,210 | $5,604 | $5,601 | | Gross client cash outflows | ($6,953) | ($7,214) | ($6,940) | | Net client cash flows | ($743) | ($1,610) | ($1,339) | | Artisan Funds' distributions not reinvested | ($222) | ($91) | ($75) | | Investment returns and other | $9,918 | $204 | ($5,080) | | Ending assets under management | $167,840 | $158,887 | $136,495 | | Average assets under management | $162,783 | $158,579 | $142,199 | AUM Changes for Nine Months Ended September 30, 2024 (millions) | Metric | Sep 30, 2024 | Sep 30, 2023 | | :-------------------------------------- | :----------- | :----------- | | Beginning assets under management | $150,167 | $127,892 | | Gross client cash inflows | $18,001 | $15,889 | | Gross client cash outflows | ($20,876) | ($19,567) | | Net client cash flows | ($2,875) | ($3,678) | | Artisan Funds' distributions not reinvested | ($398) | ($190) | | Investment returns and other | $20,946 | $12,471 | | Ending assets under management | $167,840 | $136,495 | | Average assets under management | $158,514 | $138,982 | AUM by Investment Team and Vehicle AUM is diversified across various investment teams and vehicles. The International Value Team holds the largest AUM, followed by the Growth Team and Global Value Team. AUM is split between Artisan Funds & Artisan Global Funds and Separate Accounts & Other, with both categories showing growth Ending AUM by Investment Team (Sep 30, 2024, millions) | Investment Team | Ending AUM | | :-------------------------- | :----------- | | Growth Team | $39,662 | | Global Equity Team | $13,765 | | U.S. Value Team | $7,811 | | International Value Team | $46,948 | | Global Value Team | $29,728 | | Sustainable Emerging Markets| $2,006 | | Credit Team | $11,622 | | Developing World Team | $4,225 | | Antero Peak Group | $2,403 | | International Small-Mid Team| $7,311 | | EMsights Capital Group | $2,359 | | Total | $167,840 | Ending AUM by Vehicle (Sep 30, 2024, millions) | Vehicle | Ending AUM | | :------------------------------------- | :----------- | | Artisan Funds & Artisan Global Funds | $81,054 | | Separate Accounts and Other | $86,786 | | Total | $167,840 | - The International Small-Mid team became its own autonomous investment franchise effective March 31, 2024[43][47] Investment Strategy AUM and Performance Artisan Partners' investment strategies demonstrate varied performance across different time horizons, with many strategies outperforming their respective benchmarks since inception. Notable strategies include Global Opportunities, U.S. Mid-Cap Growth, International Value, and Credit Opportunities, which have generated significant value-added Selected Investment Strategy AUM and Performance (As of Sep 30, 2024) | Investment Team and Strategy | Strategy AUM ($MM) | 1 YR Return (%) | 5 YR Return (%) | Inception Return (%) | Value-Added Since Inception (bps) | | :------------------------------------ | :----------------- | :-------------- | :-------------- | :------------------- | :-------------------------------- | | Growth Team | | | | | | | Global Opportunities Strategy | $22,005 | 33.31% | 13.02% | 11.30% | 439 | | U.S. Mid-Cap Growth Strategy | $12,792 | 17.31% | 10.57% | 14.19% | 443 | | U.S. Small-Cap Growth Strategy | $3,177 | 26.30% | 8.64% | 10.64% | 285 | | Global Equity Team | | | | | | | Non-U.S. Growth Strategy | $13,217 | 26.72% | 7.01% | 9.58% | 435 | | China Post-Venture Strategy | $188 | 24.23% | --- | (6.90)% | 492 | | U.S. Value Team | | | | | | | Value Equity Strategy | $4,931 | 25.22% | 14.56% | 9.78% | 156 | | U.S. Mid-Cap Value Strategy | $2,863 | 21.84% | 10.65% | 12.10% | 241 | | International Value Team | | | | | | | International Value Strategy | $46,605 | 27.80% | 13.84% | 12.01% | 562 | | Credit Team | | | | | | | High Income Strategy | $11,295 | 15.87% | 7.14% | 7.21% | 244 | | Credit Opportunities Strategy | $254 | 21.20% | 16.86% | 13.82% | 1,148 | | Developing World Team | | | | | | | Developing World Strategy | $4,225 | 44.55% | 13.81% | 11.82% | 728 | | EMsights Capital Group | | | | | | | Global Unconstrained Strategy | $655 | 10.31% | --- | 10.38% | 619 | - Artisan High Income Fund was ranked 4 of 302 funds in its Lipper category over the ten years since its inception[6][25] - Value-added is measured as the basis point difference between the strategy's average annual gross composite return and its respective benchmark[24][52] General Information This section provides details on the upcoming conference call, important forward-looking statements, and a brief overview of Artisan Partners as an investment management firm Conference Call Artisan Partners will host a conference call on October 30, 2024, at 1:00 p.m. ET to discuss the 3Q24 results, featuring CEO Eric Colson, President Jason Gottlieb, and CFO C.J. Daley. Supplemental materials and webcast access are available on the company's website - Conference call to discuss results scheduled for October 30, 2024, at 1:00 p.m. (Eastern Time)[23] - Key speakers include CEO Eric Colson, President Jason Gottlieb, and CFO C.J. Daley[23] - Supplemental materials and webcast available on www.apam.com[23](index=23&type=chunk) Forward-Looking Statements and Disclosures This section outlines the forward-looking nature of certain statements in the release, emphasizing that actual results may differ due to various risks, including loss of key personnel, adverse market conditions, and regulatory changes. It also defines key terms like Assets Under Management (AUM), Value Added, and Excess Returns, and clarifies how composite returns and benchmarks are calculated - Statements regarding future events and performance are forward-looking and subject to risks and uncertainties[24] - Key risk factors include loss of key investment professionals, adverse market conditions, poor strategy performance, and changes in the regulatory environment[24] - AUM definition includes non-discretionary model portfolios reported on a lag, and is not based on ADV or fund management agreements[24] - Value Added is the difference between a strategy's average annual return and its benchmark, while Excess Returns (alpha) estimate outperformance in dollars[24] About Artisan Partners Artisan Partners is a global investment management firm established in 1994, known for providing high value-added investment strategies to sophisticated clients worldwide. The firm emphasizes attracting experienced, disciplined investment professionals and operates with autonomous investment teams managing diverse strategies across multiple asset classes through various investment vehicles - Artisan Partners is a global investment management firm providing high value-added investment strategies[25] - Established in 1994, the firm focuses on attracting experienced, disciplined investment professionals[25] - Autonomous investment teams oversee diverse strategies across multiple asset classes and investment vehicles[25]