BlackRock, Inc. (NYSE:BLK) Q1 2024 Earnings Call Transcript

BlackRock, Inc. (NYSE:BLK) Q1 2024 Earnings Call Transcript April 12, 2024

BlackRock, Inc. beats earnings expectations. Reported EPS is $9.81, expectations were $9.35. BLK isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Katie, and I will be your conference facilitator today. At this time, I’d like to welcome everyone to the BlackRock Incorporated First Quarter 2024 Earnings Teleconference. Our host for today’s call will be Chairman and Chief Executive Officer, Laurence D. Fink; Chief Financial Officer, Martin S. Small; President, Robert S. Kapito; and General Counsel, Christopher J. Meade. All lines have been made on mute to prevent any background noise. [Operator Instructions] Mr. Meade, you may begin your conference.

Chris Meade: Thank you. Good morning, everyone. I’m Chris Meade, the General Counsel of BlackRock. Before we begin, I’d like to remind you that during the course of this call, we may make a number of forward-looking statements. We call your attention to the fact that BlackRock’s actual results may, of course, differ from these statements. As you know, BlackRock has filed reports with the SEC, which lists some of the factors that may cause the results of BlackRock to differ materially from what we say today. BlackRock assumes no duty and does not undertake to update any forward-looking statements. With that, I’ll turn it over to Martin.

Martin Small: Thanks, Chris, and good morning, everyone. It’s my pleasure to present results for the first quarter of 2024. Before I turn it over to Larry, I’ll review our financial performance and business results. Our earnings release discloses both GAAP and as adjusted financial results, I’ll be focusing primarily on our as adjusted results. BlackRock’s first quarter results reflect sustained momentum across our entire platform. We ended the quarter with record AUM of nearly $10.5 trillion and one of the strongest opportunity sets ahead across multiple growth engines, including technology, outsource solutions and private markets. Momentum is accelerating and we have line of sight into a breadth of significant mandates in investment management and technology, spanning client channels and geographies.

Teams across BlackRock are energized and organized to execute on these opportunities and deliver BlackRock’s platform to clients through world-class client service. We’ve built BlackRock to be a structural grower with industry leadership in secular growth areas like ETFs, private markets, model portfolios and technology. With supportive markets and more optimistic sentiment from clients, we’re confident in our ability to both grow assets on behalf of clients and drive profitable growth for our shareholders. First quarter long-term net inflows of $76 billion continue to lead the industry, driving positive organic base fee growth alongside double-digit growth year-over-year in revenue and earnings, as well as 180 basis points of margin expansion.

Excluding low fee institutional index equity flows, we saw a $100 billion of long-term net inflows in the quarter. As equity markets powered to record highs in the first quarter, investors who were waiting in cash missed out on significant returns across broader markets. With long-term investing time in the markets is often more important than market timing. Although cash remains an attractive safe haven with the prospect of fewer rate cuts for 2024, the nearly 30% increase in equities over the last year continues to propel clients towards re-risking into stocks and bonds. Clients choose BlackRock for performance. They continue to consolidate more of their portfolios with us, which is driving our growth premium. With more clarity on interest rates and a supportive market backdrop, the assets we manage on behalf of our clients, our units of trust, ended the quarter up $1.4 trillion from a year ago, an increase of 15%.

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Q&A Session

Organic asset and basic fee growth, again, accelerated into the end of the quarter and we see broad base momentum growing across client channels and regions. In the first quarter, BlackRock generated long-term net inflows of $76 billion partially offset by seasonal outflows from institutional money market funds. Total annualized organic base fee growth of 1% reflected seasonally softer flows earlier in the quarter before coming back to target in March. First quarter revenue of $4.7 billion increased 11% year-over-year, driven by the impact of market appreciation over the last 12 months on average AUM and higher performance fees and technology services revenue. Operating income of $1.8 billion was up 17% and earnings per share of $9.81 was 24% higher versus a year ago, also reflecting higher non-operating income.

Non-operating results for the quarter included $90 million of net investment gains, driven primarily by mark-to-market non-cash gains on our unhedged sheet capital investments and minority investment [in invest debt] (ph). Our as adjusted tax rate for the first quarter was approximately 23% and included discrete tax benefits related to stock-based compensation awards that vest in the first quarter of each year. We continue to estimate that 25% is a reasonable projected tax run rate for the remainder of 2024, though the actual effective tax rate may differ because of non-recurring or discrete items or potential changes in tax legislation. First quarter base fee in securities lending revenue of $3.8 billion was up 8% year-over-year and up 5% sequentially driven by the positive impact of market beta on average AUM and positive organic base fee growth.

On an equivalent day count basis, our annualized effective fee rate was 3/10 of a basis point lower compared to the fourth quarter. This was mainly due to the relative outperformance of lower fee U.S. equity markets, client preferences for lower fee U.S. exposures and lower securities lending revenue. Performance fees of $204 million increased from a year ago, primarily reflecting higher revenue from alternatives. Quarterly technology services revenue was up 11% compared to a year ago, reflecting sustained demand for our Aladdin technology offerings. Annual contract value or ACV increased 9% year-over-year. Beginning in the first quarter of 2024, earnings recognized from minority investments accounted for under equity method will be presented as part of our non-operating results.

Advisory and other revenue increased from a year ago, primarily reflecting this change. In addition, as many of you know, we updated the presentation of expense line items by including a new sales asset and account income statement caption. This category includes distribution and servicing costs, direct fund expense and sub-advisory and other sales asset and account-based expense. Sub-advisory and other expense, which are variable non-compensation expenses associated with asset and revenue growth was previously reported within general and administration expense. We believe this change provides investors a clearer view of both BlackRock’s variable non-compensation expense and G&A, which represents more fixed costs. It represents how we’ll execute on our financial rubric of aligning investment spend with our highest conviction growth areas, variabilizing more of our expense base and generating fixed cost scale.

Total expense increased 8% year-over-year, reflecting higher compensation, G&A and sales asset and account expense. Employee compensation and benefit expense was up 11%, primarily reflecting higher incentive compensation as a result of higher operating income and performance fees. G&A expense increased 6% due to the timing of technology investment spend in the prior year. Sequentially, G&A expense decreased 12%, reflecting timing of technology investment spend and seasonally higher marketing and promotional expense in the fourth quarter. While one quarter’s results can be impacted by timing of spend, we expect technology to be one of our primary areas of investment within G&A. Sales asset and account expense increased 5% compared to a year ago, primarily driven by higher direct fund expense.

Direct fund expense was up 7% year-over-year, mainly due to higher average index AUM. Sequentially, direct fund expense increased due to higher average index AUM in the current quarter and higher rebates that seasonally occurred in the fourth quarter. Our first quarter as adjusted operating margin of 42.2% was up 180 basis points from a year ago. As markets improve, we remain committed to driving operating leverage and profitable growth. BlackRock’s industry leading organic growth is a direct result of the disciplined investments we’ve made consistently through market cycles. Looking forward, we’ll continue to prioritize investments with differentiated organic growth potential or that will expand operating leverage through enhanced scale. In line with our guidance in January and excluding the impact of global infrastructure partners and related transaction costs, at present, we would expect our headcount to be broadly flat in 2024 and we would also expect a low to mid-single-digits percentage increase in 2024 core G&A expense.

Our capital management strategy remains consistent. We invest first, either to scale strategic growth initiatives or drive operational efficiency and then return excess cash to our shareholders through a combination of dividends and share repurchases. At times, we may make inorganic investments, where we see an opportunity to accelerate organic growth and support our strategic initiatives. Last month, we announced our agreement to acquire the remaining equity interest in SpiderRock Advisors, a leading provider of customized option overlay strategies in the U.S. wealth market. This transaction expands on BlackRock’s minority investment in SpiderRock Advisors made in 2021 and builds on BlackRock’s strong growth in personalized separately managed accounts via Aperio and ETF model portfolios.

At present, we expect the transaction to close in the second quarter of this year, subject to customary closing conditions. In March, we issued $3 billion of debt to fund a portion of the cash consideration for our planned acquisition of GIP. Our offering consisted of three tranches of senior unsecured notes across 5, 10 and 30 year maturities. The offering was well received by fixed income investors, especially our inaugural 30 year bond. We currently have invested the proceeds of the offering at substantially the same rate as the cost of borrowing, effectively eliminating incremental cost of carrying additional debt prior to the close of the GIP transaction. We continue to target the third quarter of 2024 for the closing of the GIP transaction, which remains subject to regulatory approvals and other customary closing conditions.