Focus Financial Partners posted earnings on Thursday that exceeded analyst expectations, even as M&A activity dropped by 37% from last year and the firm’s organic growth rate fell into negative territory in the fourth quarter.
Investors were barred from asking questions during a quarterly earnings call with CEO Rudy Adolf and CFO Jim Shanahan following the earnings release.
In consideration of ongoing negotiations to sell the firm and take it private, Adolf and Shanahan stuck to prepared statements and declined to take questions after sharing the quarterly and annual updates, highlighting areas of focus going forward and crediting the firm’s model for the better-than-expected performance. Little mention was made of the pending sale to private equity firm Clayton, Dubilier & Rice for $53 per share, or $4.1 billion in cash.
Focus posted total annual revenue of $2.1 billion in 2022, 19.2% higher than last year, due primarily to $315.5 million in revenue growth from partner firms and driven by higher management fees. Of that, $121.2 million came from partner firms that were acquired on or after Dec. 31, 2021.
GAAP-adjusted annual income was $125.3 million for the year, a 414% year-over-year increase from $24.4 million, and GAAP earnings per share was $1.40, up from $0.18 in 2021. Adjusted EBITDA was $537.5 million, 19.1% higher than the previous year.
Year over year, the organic growth rate was 8.5%, down 22% from 2021.
“Despite the challenging macro environment correlated across virtually all asset classes throughout 2022, our full-year performance was solid, finishing well in Q4 with strong momentum into 2023,” said Adolf. He credited the firm’s diversity, discipline and scale for its resiliency and said Focus is well positioned to take advantage of an eventual economic recovery.
“Decent results,” commented Gabelli portfolio manager Macrae Sykes, whose GABF ETF is invested in the company.
Focus' Q4 2022 revenue was $547.7 million, a 4.5% year-over-year increase and nearly 6% higher than industry expectations. The increase was primarily driven by $14.6 million in revenue from newly acquired firms, according to Adolf.
About $394.3 million of that, or 72%, was correlated to the financial markets, including $245.3 million generated from advance billings based on Q3 market levels. The remainder is attributable to revenue driven by added family office services, tax advice and fixed fees for high-net-worth clients.
Adjusted EBITDA was 5.59% higher than last year, at $136.7 million, and non-GAAP earnings per share came in at $0.99 for Q4—eight cents more than industry expectations.
The firm’s organic growth rate dropped from 3.4% in the previous quarter to -3.5% in the fourth but remained above the expected rate of -10%.
“Our Q4 results were solid and exceeded our estimates on all measures,” said Shanahan, adding that organic revenues, “were impacted by the volatile market conditions in 2022.”
Focus completed 24 M&A transactions in 2022, including five new partner firms and 19 tuck-ins. That’s down from 38 total transactions in 2021, but the company appears to be making up for the lag in the first quarter of 2023. Seven deals have already closed in the first six weeks of the year—one partner firm and six tuck-ins—and four more are expected before April.
With around $1 billion in deployable liquid assets, including $317.7 million available for capital allocation, Adolf said the firm is in a good position to continue picking up desirable firms as they come to market.
“We continue to acquire high-quality RIAs and other independent wealth managers, but we are also selectively adding firms with unique capabilities that can benefit our partnership,” he said, mentioning alternative investment capabilities and international markets as major areas of focus.
With approximately $2.6 billion in outstanding debt and a net leverage ratio of 4.19%, Focus has remained below its target of 4.5%. That’s at least partly due to flexible deal structures that push consideration payments out years, lowering immediate cash requirements while also adding to the company’s future liability, said Shanahan.
“We continue to navigate the ongoing market challenges,” he said, “as well as remain highly disciplined in how we deploy capital to position ourselves to take advantage of the enormous growth opportunity ahead once markets begin to recover.”
"There's nothing in the numbers to suggest the value is lower than people thought," one institutional investor said on background. One of several shareholders who have expressed disappointment with the price at which the firm is considering a sale to CD&R, he said he wasn't surprised Adolf and Shanahan didn't take questions.
"I suspect those who find $53 (per share) unfair will continue to do so," he said.
The firm's stock price dipped briefly following the call but remained close to $50.20 per share.