T. Rowe Price's Q1 Earnings Lag on Higher Costs, AUM Up - Analyst Blog

Despite strong top-line performance, T. Rowe Price Group, Inc.TROW came out with dismal first-quarter 2015 results. The company reported net income of $1.13 per share, missing the Zacks Consensus Estimate by a penny. However, this compared favorably with the year-ago earnings of $1.12 per share.

T Rowe Price Group Inc. - Earnings Surprise | FindTheCompany

Elevated operating expenses remain a concern. Nevertheless, top-line growth and improved assets under management ("AUM") were the positives.

Net income came in at $309.5 million compared with $304.3 million in the prior-year quarter.

Performance in Detail

In the first quarter, net revenue increased 8% to $1.03 billion from $954.6 million in the year-ago period. The rise was primarily driven by elevated investment advisory fees that jumped 8.5% year over year to $896.5 million. However, net revenue came at par with the Zacks Consensus Estimate.

Distribution and servicing fees escalated 11.3% year over year to $37.5 million. Administrative fees, on the other hand, decreased 1.6% year over year to $93.0 million.

Investment advisory revenues, earned from the T. Rowe Price mutual funds distributed in the U.S., grew 9% year over year to $645.9 million. Investment advisory revenues earned from other investment portfolios managed by the company increased 6% from the year-ago quarter to $250.6 million.

Total operating expenses rose 9% year over year to $549.2 million in the quarter. The upsurge was triggered by elevated costs across all the components, with an 8.7% rise in compensation and related costs, and an 11.3% increase in distribution and servicing expenses.

Notably, T. Rowe Price anticipates total advertising and promotion costs for 2015 to increase about 5% year over year.

As of Mar 31, 2015, T. Rowe Price employed 5,905 associates, 3.8% higher than last year.

Assets Position

As of Mar 31, 2015, total AUM increased 3.5% to $772.7 billion from $746.8 billion as of Dec 31, 2014. During the year, market appreciation and income came in at $24 billion while net cash inflows were $1.9 billion.

T. Rowe Price remains debt-free with substantial liquidity, including cash and sponsored portfolio investment holdings of about $3.7 billion, which would support the company's ability for future investments.

Capital Deployment Activity

During the reported quarter, T. Rowe Price repurchased 1.4 million shares of its common stock for $113.6 million and invested $41 million in capitalized technology and facilities from available cash balances.

The company anticipates capital expenditure in 2015 to be approximately $175 million, due to property and equipment additions.

Our Viewpoint

We believe that despite active competition, the company holds significant long-term upside potential based on its disciplined risk-aware investment approach, which focuses on diversification, consistency in style and fundamental research.

T. Rowe Price, backed by its financial stability, will likely benefit from growth opportunities in the domestic and global assets under management. With a debt-free position, higher return on earnings and improving investor sentiment, we believe the company's fundamentals will continue to show strength.

Furthermore, a relatively better performance of the mutual fund was a positive. However, higher operating expenses and stringent regulatory norms remain as concerns.

Currently, shares of T. Rowe Price carry a Zacks Rank #3 (Hold).

Among other investment managers, Janus Capital Group, Inc. JNS is scheduled to report March quarter-end results on Apr 23, Invesco Ltd. IVZ on Apr 30 and Legg Mason Inc. LM on May 1.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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