T. Rowe Price Group, Inc. (NASDAQ-GS: TROW) today reported its first quarter of 2017 results, including net revenues of $1.1 billion, net income of $385.9 million, and diluted earnings per common share of $1.54. On a comparable basis, net revenues were $1.0 billion, net income was $304.1 million, and diluted earnings per common share was $1.18 in the first quarter of 2016.
The table below presents financial results on a U.S. GAAP basis, as well as a non-GAAP basis, to adjust for the impact of the consolidated sponsored investment portfolios and other non-operating income, and the additional insurance recovery related to the Dell appraisal rights matter. The firm believes the non-GAAP financial measures below provide relevant and meaningful information to investors about its core operating results.
In the first quarter of 2017, the firm recognized a $50.0 million reduction in pretax operating expenses from successful insurance claims made in relation to the Dell appraisal rights matter. A quarterly summary of the financial impact of the Dell matter on our pre-tax operating expenses and pre-tax operating cash flows (in millions) since the matter arose is as follows:
Assets Under Management
Assets under management increased $50.8 billion in the first quarter of 2017 to $861.6 billion at March 31, 2017. The firm's net cash inflows were $.7 billion in the first quarter of 2017. The components of the change in assets under management for the three months ended March 31, 2017, are shown in the table below.
The firm's net cash flows continued to be impacted in the first quarter of 2017 by clients reallocating to passive investments. Net cash flows into the firm's target date retirement portfolios were $2.3 billion in the first quarter of 2017.
Investors domiciled outside the United States accounted for about 5% of the firm's assets under management at December 31, 2016 and March 31, 2017.
T. Rowe Price remains debt-free with ample liquidity, including cash and discretionary sponsored portfolio investment holdings of $2.2 billion at March 31, 2017, and redeemable seed capital investments in sponsored investment portfolios of $1.3 billion. The firm's common shares outstanding decreased since the end of 2016 as the firm expended $316.3 million to repurchase 4.6 million shares, or 1.9%, of its outstanding common shares during the first quarter of 2017. The firm invested $46.9 million during the first quarter of 2017 in capitalized facilities and technology. The firm expects capital expenditures for 2017 to be up to $200 million, of which about two-thirds is planned for technology initiatives. The firm's expenditures are expected to continue to be funded from operating resources.
The percentage of the T. Rowe Price mutual funds across their share classes that outperformed their comparable Lipper averages on a total return basis and that are in the top Lipper quartile for the one-, three-, five-, and 10-years ended March 31, 2017, were:
In addition, 87% of our rated Price Funds' assets under management ended the quarter with an overall rating of four or five stars from Morningstar. The performance of the firm's institutional strategies against their benchmarks remains very competitive especially over longer time periods.
Investment advisory revenues earned in the first quarter of 2017 from the T. Rowe Price mutual funds distributed in the U.S. were $715.8 million, an increase of $83.7 million, or 13.2%, from the comparable 2016 quarter. Average U.S. mutual fund assets under management in the first quarter of 2017 increased 15.2% from the average in the first quarter of 2016 to $536.5 billion.
Investment advisory revenues earned in the first quarter of 2017 from other investment portfolios were $275.3 million, an increase of $36.6 million, or 15.3%, from the comparable 2016 quarter. Average assets under management for these portfolios in the first quarter of 2017 were $308.9 billion, an increase of 17.7% from the average in the first quarter of 2016.
The firm has reduced the management fees of certain of its mutual funds and other portfolio investments since the end of the first quarter of 2016. The firm regularly assesses the competitiveness of such fees and will continue to make adjustments as deemed appropriate. These reductions were a factor in why investment advisory revenue grew slower than average assets under management in the first quarter of 2017 compared to the 2016 period.
Operating expenses, excluding the $50.0 million in insurance recoveries related to the Dell appraisal rights matter, were $641.9 million in the first quarter of 2017, an increase of $58.7 million from the comparable 2016 quarter. The firm currently expects that its planned operating expenses, excluding the operating expense impact of the Dell appraisal rights matter, will grow about 10% in 2017 versus 2016. The firm could elect to modify the pace of spending on its planned initiatives should markets rise or decline significantly.
Compensation and related costs increased $42.2 million compared to the first quarter of 2016, due primarily to additional headcount, an increase in the interim accrual of the annual bonus, and higher benefits. The firm's benefits have increased in the first quarter of 2017 primarily due to an increase in market valuations on a larger supplemental savings plan liability, which results in additional compensation expense. These increases were offset in part by higher labor capitalization related to internally developed software as the firm continues to invest in its technology capabilities. Average staff size increased by 5.5% from the first quarter of 2016, and the firm employed 6,474 associates at March 31, 2017.
Advertising and promotion costs were $25.6 million in the first quarter of 2017, compared with $23.1 million in the 2016 quarter. The firm currently expects advertising and promotion costs for 2017 to be up to 10% higher than the 2016 year as the firm executes on a number of strategic initiatives.
Occupancy and facility costs, together with depreciation expense, were $81.0 million in the first quarter of 2017, an increase of $7.4 million, or 10.1%, compared to the first quarter of 2016. The increase is primarily attributable to the added costs to update and enhance technology capabilities, including related maintenance programs.
The firm's effective tax rate for the first quarter of 2017 was 37.1%. The firm currently estimates its effective tax rate for 2017 will be about 37.7%.
William J. Stromberg, the company's president and chief executive officer, commented: "Solid earnings expectations and strengthening global economic data helped U.S. stocks sustain their post-election rally and record tangible gains in the first quarter of 2017. Indexes did turn mixed in March, however, following the Federal Reserve's mid-month decision to raise short-term interest rates and concerns that the new administration's legislative agenda could face greater headwinds than previously believed.
"Reversing last quarter's trend, stocks in developed non-U.S. markets fared better than U.S. shares. A weaker dollar versus major non-U.S. currencies lifted returns in dollar terms, European equity markets benefited from improving trends, and the UK's initial steps to leave the European Union went relatively smoothly.
"Our assets under management grew by more than six percent in the first quarter of 2017—largely on the back of broad market appreciation—but also reflecting positive net flows into our international equity, international fixed income, and asset allocation strategies. Those net flows more than offset net outflows in U.S. equity, which continued to be impacted by clients reallocating to passive products. We believe our overall net inflows are illustrative of the strength of our relative investment performance and client services, growing investor interest and brand awareness in markets outside of the U.S., and the ongoing success of our multi-asset investment solutions.
"We are pleased with the progress we are seeing in previously announced investments in product, distribution, and technology initiatives. Recent highlights include:
- T. Rowe Price ActivePlus Portfolios–Our new digital discretionary investment management and advisory solution offering access to actively managed mutual funds and enhanced portfolio management services is now in market and helping clients meet their long-term retirement savings goals.
- New Investment Vehicles–New launches included retail separately managed accounts and model portfolios to meet the needs of our distribution partners.
- High Yield Acquisition–Our high yield capabilities will soon expand through an agreement to acquire the Henderson High Yield Opportunities Fund from Henderson Global Investors (North America) Inc. and merge it into a newly formed T. Rowe Price U.S. High Yield Fund in a transaction we expect to close in late May.
- Expanding Distribution Reach–We secured an agreement to be included on Charles Schwab's Mutual Fund OneSource® platform, making more than 100 of our mutual funds available to retail investors and advisors with no transaction fees.
- Client Experience Transformation–A new innovation lab in suburban Baltimore is driving rapid development and deployment of new and more efficient processes and improved client digital experiences.
- New York Technology Development Center–We began onboarding specialized investment and distribution technology talent to expedite implementation of advanced analytics, digital technologies, and enhanced client experiences.
"Our leadership team is pleased about progress on these strategic initiatives and salutes the outstanding work of our dedicated associates around the world."
The financial results presented in this release are unaudited. The firm expects that it will file its Form 10-Q Quarterly Report for the first quarter of 2017 with the U.S. Securities and Exchange Commission later today. The Form 10-Q will include additional information on the firm's unaudited financial results at March 31, 2017.
Certain statements in this earnings release may represent "forward-looking information," including information relating to anticipated changes in revenues, net income and earnings per common share, anticipated changes in the amount and composition of assets under management, anticipated expense levels, estimated tax rates, and expectations regarding financial results, future transactions, new products and services, investments, capital expenditures, dividends, stock repurchases, and other market conditions. For a discussion concerning risks and other factors that could affect future results, see the firm's 2016 Form 10-K and March 31, 2017 Form 10-Q.
Founded in 1937, Baltimore-based T. Rowe Price (troweprice.com) is a global investment management organization that provides a broad array of mutual funds, subadvisory services, and separate account management for individual and institutional investors, retirement plans, and financial intermediaries. The organization also offers a variety of sophisticated investment planning and guidance tools. T. Rowe Price's disciplined, risk-aware investment approach focuses on diversification, style consistency, and fundamental research.