T. Rowe Price Group, Inc. (NASDAQ-GS: TROW) today reported its third quarter of 2017 results, including net revenues of $1.2 billion, net income of $390.9 million, and diluted earnings per common share of $1.56. On a comparable basis, net revenues were $1.1 billion, net income was $327.8 million, and diluted earnings per common share was $1.28 in the third quarter of 2016.
The table below presents financial results on a U.S. GAAP basis as well as a non-GAAP basis, that adjusts for the impact of the Dell (DELL) appraisal rights matter, the firm's consolidated sponsored investment portfolios, the supplemental savings plan and other non-operating income. The firm believes the non-GAAP financial measures below provide relevant and meaningful information to investors about its core operating results.
Assets Under Management
Assets under management increased $44.3 billion in the third quarter of 2017 to $947.9 billion at September 30, 2017. The firm's net cash inflows were $5.9 billion in the third quarter of 2017, inclusive of $8.1 billion of client transfers from the mutual funds to other portfolios.
Net cash flows into the firm's target date retirement portfolios were $1.0 billion in the third quarter of 2017 and $6.4 billion in the first nine months of 2017. The asset class cash flows above reflect the rebalancing done within the target date portfolios in order to maintain their prescribed asset allocation.
Investors domiciled outside the United States accounted for about 5% of the firm's assets under management at December 31, 2016, and September 30, 2017.
The firm's common shares outstanding decreased 2.6 million shares from the end of 2016 to 242.2 million at September 30, 2017. The firm expended $456.7 million during the first nine months of 2017 to repurchase 6.6 million shares, or 2.7%, of its outstanding common shares, including $9.7 million to repurchase 117,014 shares during the third quarter of 2017. The firm invested $129.1 million during the first nine months of 2017 in capitalized facilities and technology, and expects capital expenditures for 2017 to be up to $200 million, of which about two-thirds is planned for technology initiatives. These expenditures are expected to continue to be funded from operating resources.
The percentage of T. Rowe Price mutual funds (across 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 September 30, 2017, were:
In addition, 87% of the firm's 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 current quarter from the T. Rowe Price mutual funds distributed in the U.S. were $783.9 million, an increase of 11.4% from the comparable 2016 quarter. Average U.S. mutual fund assets under management increased 12.7% to $576.1 billion.
Investment advisory revenues earned in the current quarter from other investment portfolios were $312.8 million, an increase of 17.2% from the comparable 2016 quarter. Average assets under management for these portfolios increased 20.2% to $351.3 billion.
The firm has reduced the management fees of certain of its mutual funds and other investment portfolios since mid-2016. These reductions were a factor in why investment advisory revenue grew slower than average assets under management during 2017. The firm regularly assesses the competitiveness of its fees and will continue to make adjustments as deemed appropriate.
Operating expenses were $673.2 million in the third quarter of 2017, an increase of 9.1% from the comparable 2016 quarter. On a non-GAAP basis, our operating expenses increased $50.1 million, or 8.1%, to $665.7 million. The firm currently expects that its non-GAAP operating expenses will grow about 11% in 2017 versus 2016. This increase from previous guidance of about 10% results primarily from certain expenses, such as variable compensation, that have increased as a result of stronger than anticipated market performance.
Compensation and related costs were $417.4 million in the current quarter, an increase of 8.1% over the third quarter of 2016, due primarily to additional headcount, an increase in the interim accrual of the annual bonus, and higher benefits. Higher benefit expenses include additional compensation expense related to the supplemental savings plan as stronger equity markets have increased the liability. 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 7.0% from the third quarter of 2016, and the firm employed 6,796 associates at September 30, 2017.
Advertising and promotion costs were $14.0 million in the current quarter, compared with $14.7 million in the 2016 quarter. The firm currently expects advertising and promotion costs for 2017 to increase up to 10% over 2016 as the firm executes on its strategic initiatives.
Occupancy and facility costs, together with depreciation expense, were $84.0 million in the current quarter, an increase of 5.9% compared to the third quarter of 2016. The increase is due primarily to added costs to update and enhance technology capabilities, including related maintenance programs.
Other operating expenses were $120.4 million in the current quarter, an increase of 20.0% from the comparable 2016 quarter, as operational and regulatory business demands continue to grow.
The firm's effective tax rate for the third quarter of 2017 was 34.4%, compared with the full-year 2017 rate of 37.4% that the firm expected at the time of its second quarter earnings release. The number of stock option exercises and the related tax benefits recognized were higher than originally expected. The firm currently estimates its effective tax rate for 2017 will be about 35.9%.
William J. Stromberg, the company's president and chief executive officer, commented: "U.S. stocks continued to rise in the third quarter, with most major indexes finishing September at or near record highs. Led by emerging markets, international stocks again outperformed U.S. shares as international currencies remained strong relative to the U.S. dollar. Healthy credit conditions contributed to positive fixed income returns globally, with non-U.S.and high yield debt outperforming other sectors.
"Our assets under management this quarter grew by nearly five percent, boosted by robust market returns and our highest level of net inflows since the first quarter of 2014. Our relative investment performance remained strong across asset classes and time periods, which helped drive increased client interest in our investment solutions and our approach to active investment management. We are encouraged by the green shoots of activity we see in key strategic areas.
"Highlights of our progress include:
- Multi-Asset Investing - We continue to grow our multi-asset capabilities and are delighted with the additions of a global solutions portfolio manager and three regional heads of multi-asset solutions for the U.S., EMEA, and Asia Pacific. We are also excited about several upcoming product launches.
- U.S. Intermediaries - Our mutual funds are now available to retail investors and advisors on all major retail and RIA platforms with no transaction fee. Their inclusion earlier this year on Charles Schwab's and Fidelity's NTF platforms is off to a strong start and contributing to market share growth for our U.S. intermediary channels.
- Global Product and Distribution - Activity outside the U.S. includes further buildout of our SICAV and OEIC lineups, and new business across EMEA and Asia Pacific. We also continue to develop new products across asset classes and geographies that are intended to broaden our product offerings.
- New York Technology Development Center (TDC) - The New York TDC has moved to its permanent location in Midtown South, where a growing team of specialized technology professionals and data scientists is enhancing our capabilities to amplify the firm's use of advanced analytics, machine learning, and digital technologies to improve client experiences, enhance customer segmentation, and augment our investment process.
"Despite the competitive challenges from passive and intensified regulation, the outstanding work of our associates in delivering results and meeting the needs of our clients is keeping us on the right path for growth. We remain committed to the planned investments in our strategic initiatives and we are confident that this will strengthen our competitiveness and performance in the years ahead."
The financial results presented in this release are unaudited. The firm expects that it will file its Form 10-Q Quarterly Report for the third 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 September 30, 2017.
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.