VCTR - NASDAQ

Good morning, and welcome to the Victory Capital Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Mr. Matthew Dennis, Chief of Staff and Director of Investor Relations. Please go ahead, Mr. Dennis.

Thank you. Before I turn the call over to David Brown, I would like to remind you that during today's conference call, we may make several forward-looking statements. Victory Capital's actual results may differ materially from these statements. Please refer to our SEC filings for a list of some of the risk factors that may cause actual results to differ materially from those expressed on today's call. Victory Capital assumes no duty and does not undertake any obligation to update any forward-looking statements. Our press release, which was issued after the market closed yesterday, disclose both GAAP and non-GAAP financial results. We believe the non-GAAP measures enhance the understanding of our business and our performance. Reconciliations between these non-GAAP measures and the most comparable GAAP measures are included in tables that can be found in our earnings press release and in the slides accompanying this call, both of which are available on the Investor Relations section of our website at ir.vcm.com. It is now my pleasure to turn the call over to David Brown, Chairman and CEO. David?

Thanks, Matt. Good morning, and welcome to Victory Capital's Fourth Quarter 2025 Earnings Call. I'm joined today by Michael Policarpo, our President, Chief Financial and Administrative Officer; as well as Matt Dennis, our Chief of Staff and Director of Investor Relations. I'll begin today by reviewing the fourth quarter, which capped off a transformational year for Victory Capital, one marked by significant operating and financial milestones. Most notably, we successfully closed our strategic partnership with Amundi and integrated Pioneer Investments onto our platform. From a financial perspective, 2025 was a landmark year. We surpassed $1 billion in annual revenue for the first time in our company's history, while also delivering record earnings, milestones that underscore the strength of our diversified platform and the momentum we've built as we look forward to 2026. Following my remarks, I'll turn the call over to Mike, who will provide a detailed review of our fourth quarter and full year financial results. After that, we will be available to answer your questions. The quarterly business overview begins on Slide 5. We had an excellent final quarter to end 2025. We achieved record high AUM in the quarter and ended the year with $317 billion in total client assets. Client engagement remained exceptionally strong with long-term gross flows of $17.1 billion, representing our highest level ever of quarterly gross sales. We generated very strong sales momentum in our international distribution channel, our VictoryShares ETF platform and multiple investment franchises. This momentum was supported by new products and creating vehicles for distribution outside of the U.S. as well as our recently enlarged U.S. sales force and increasing investments in our distribution partners. Long-term net flows of minus $2.1 billion were off trend and reflected several onetime items during the quarter. The one-off outflows were primarily attributable to one large platform redeeming one of our strategies, which was close to $1 billion and several larger year-end client reallocation redemptions where clients redeemed to get back in their investment policy guidelines, but still have sizable accounts and remain our clients. Profitability remained excellent to end the year with record adjusted EBITDA of $197.5 million, supported by a strong fee rate that increased quarter-over-quarter, and the achievement on a run rate basis of $97 million of the targeted $110 million in net expense synergies at year-end. The adjusted EBITDA margin of 52.8% in the quarter is up from last quarter and is a result of our continued superb execution. We continue to have one of the highest, if not the highest, EBITDA margins of any publicly traded traditional asset manager. These strong results translated to record quarterly adjusted earnings per diluted share with tax benefit of $1.78. When you look at our long-term EPS growth chart, which is in the appendix of this presentation on Slide 21, you can see our 21% compounded annual growth rate in EPS since our IPO. This steady progression demonstrates the resilience and quality of our differentiated platform in many different market environments and significant changes in the industry. As we look to the future, we see the same growth trajectory as we have experienced since our IPO in 2018 for the upcoming years. Stepping back for a moment, when we look at our full year accomplishments, we achieved record financial performance across a broad spectrum of key metrics. Today, Victory Capital offers a more comprehensive suite of investment capabilities and manages more assets for a larger and more diversified client base than at any point in our company's history. Our reach now extends across multiple U.S. distribution channels and internationally, it spans over 60 countries with 17% of our AUM currently coming from clients outside of the U.S. While we are certainly proud of our long-term success, our strategy has never been simply to grow for growth's sake alone. Rather, we are purposely focused on strategically expanding and deepening our relationships with intermediary platforms, financial advisers, institutional investors, consultants and direct investors. This approach ensures that our growth is sustainable, profitable and aligned with delivering value to both our clients and our shareholders. The acquisition of the Amundi U.S. business, Pioneer Investments, was truly transformational. It was not about only enhancing scale. It was a multifaceted transaction that brought us strong investment capabilities, a well-known brand at Pioneer, globalization of our company by significantly expanding our presence outside the U.S., and it provided us with a deeper platform to accelerate our company-wide growth strategy. It is also worth noting that under our ownership, Pioneer Investments, investment performance has remained extremely strong. If you compare Morningstar data from the end of this year versus the end of last year when they were under Amundi ownership, the overall investment performance metrics have been steady or in many cases, improved. Pioneer Investments has also continued to experience organic growth and is net flow positive in each quarter since the transaction's closing. This is a good example of our ability to enhance acquired businesses without disrupting the investment process or client experience. Our integration efforts are close to complete. We are on track to reach the full $110 million target during the 2026 calendar year. Beyond the numbers, we're continuing to integrate our sales forces in the different channels. As we fully integrate our sales forces, we anticipate our current sales momentum will increase. One of the most exciting outcomes of this transaction is how it has globalized our business. We now have 17% of our AUM coming from clients outside of the U.S. across 60 countries. This international diversification is significant strategically and represents a tremendous growth opportunity. Our business outside the United States is net flow positive since closing and in the fourth quarter and continues to ramp up in 2026. We have added resources to handle the influx of international RFPs and continue to make other investments in this area. International geographies provide us with new distribution channels and client segments that were not previously accessible to us. As we continue to expand and integrate our international sales force and launch products suitable for these markets, we expect this to be a sustainable source of growth going forward. To support our international expansion, Amundi launched 5 new UCITS products during the fourth quarter specific to Victory Capital. These registered products are designed for distribution outside the U.S. and include 3 UCITS that are managed by our RS Global and RS Value investment teams and 2 are managed by Pioneer Investments. These product launches set us up well for 2026 and beyond and as we continue to build out our international shelf space, and we are planning for more UCITS launches in 2026. Turning to Slide 6. Our ETF platform delivered another strong quarter with $1 billion in positive net flows, bringing year-end assets to nearly $19 billion. This growth shows no sign of slowing as we are off to a nice start in 2026. We are winning new shelf space at multiple U.S. intermediary platforms and Amundi's sales force began selling our U.S.-listed ETFs overseas at the start of this year. This adds a new distribution engine to the growth story. The consistency of our progress here is particularly noteworthy. Our Free Cash Flow ETF series generated positive net flows every single month in 2025, while our active fixed income ETFs also produced strong net inflows throughout the year. This is not sporadic success. It is sustained due to demand for our value-added product lineup. Our recent platform wins validate this outlook. For example, at Morgan Stanley, our VictoryShares Core Intermediate Bond ETF, ticker UITB and the VictoryShares Short-Term Bond ETF, ticker USTB, broke through as the first active fixed income ETFs on their Morgan Stanley wealth management focus list. Our VictoryShares Free Cash Flow ETF, ticker VFLO continues to be highlighted in the single factor subcategory as the top-rated quality ETF option on Merrill's platform. Meanwhile, USTB has also earned recommended list status at Wells Fargo, RBC and LPL. These are just a few of our recent wins that demonstrate broad-based recognition of our capabilities. The economics of this business remain compelling as well. With an average fee rate of 34 basis points across our 23 ETF suite, this business contributes meaningfully to both organic growth and profitability. Turning to Slide 9. I'm pleased to report improvements in investment performance across both short- and long-term periods. 54 mutual funds and ETFs, representing 65% of our rated fund AUM achieved 4- or 5-star overall ratings from Morningstar. According to Morningstar, nearly half of our fund AUM ranked in the top quartile over the trailing 3-year period. It's important to note that these figures represent only our products with Morningstar ratings. Many of our newer high-growth products, including several from our expanding VictoryShares platform, have yet to reach their 3-year anniversary and therefore, aren't eligible for Morningstar ratings. When we look at our entire AUM against benchmarks, picture is strong, well over 60% is outperforming across key time periods. This broad-based investment performance strength across our platform gives us confidence in our ability to continue winning new mandates and retaining existing client relationships over a long-term horizon. Turning to capital allocation on Slide 10. Our #1 priority is to ensure that our balance sheet can support our inorganic growth strategy. Over the last year, we have materially brought down net leverage to the lowest level for the company since we went public in 2018. Additionally, given that our earnings are at the highest levels they have ever been, we are now generating the most cash we ever have as a company. This puts us in an excellent position to execute inorganically and to execute with size and scale, which is our preference. We continue to be extremely busy from an acquisition standpoint. In fact, I would say the busiest we ever have been. Add this to a very conducive environment for acquisitions in our sector, where the issues on why the consolidation is happening are becoming more pronounced. Factoring the aforementioned, I could not be more encouraged about the acquisition opportunity set. The exact timing of an acquisition is always hard to predict and patience is an asset when sourcing and diligencing opportunities. That said, our cadence of executing quite frequently has been consistent over the last decade plus, and I see no reason for that to change as we look forward. Our second priority with our capital is the buyback of our stock. We think the sector is underappreciated and undervalued and our company is ground zero for this. We have a 21% EPS CAGR since our IPO 8 years ago, over 50% margins that have expanded materially over the years to be best-in-class, strong cash flow with a sizable cash tax benefit supported by strong diversified recurring revenue stream and an expense base that is 2/3 variable and is well tested during multiple market environments. Moreover, our firm-wide investment performance is excellent, and we are just beginning to see the benefits of the globalization of our business through the opening of the distribution channels outside the U.S. Within the U.S., we've increased the size of our sales force significantly throughout our different channels. Lastly, we recorded the highest level of gross sales we ever have had in the history of our company this past quarter. All of this makes us extremely excited to be buyers of our stock through our buyback program given the current value ascribed to our business by the market. To be even clearer, we will buy our stock back even more aggressively, we're working on executing on our next transformational acquisition. We think using our capital to purchase our stock or to execute on a transformational acquisition are great outcomes for our shareholders. With that, I will turn the call over to Mike, who will go through the financial results in more detail. Mike?

Thanks, Dave, and good morning, everyone. The financial results review begins on Slide 13. Our financial results demonstrate the strength of our integrated platform and the operating efficiency in our business. Revenue reached $374.1 million, up 3.6% sequentially from the third quarter, driven by a 3.1% increase in average AUM to $312.9 billion. At the same time, our revenue realization rate increased slightly, reflecting the diversified mix of our product suite and client base. GAAP operating income was $153 million and GAAP net income was $1.32 per diluted share. Both metrics were up sharply from the third quarter and the same period last year. Adjusted EBITDA reached a record $197.5 million, up $7 million or 3.7% from the prior quarter. This marks continued growth as we get closer to the full realization of our projected net expense synergies. Our adjusted EBITDA margin increased to 52.8%, demonstrating our ability to maintain profitability while simultaneously investing in our platform. With 88% of our net expense synergies now realized on a run rate basis, we are on track to achieve our full $110 million target during 2026, which is ahead of our original time line. Adjusted net income with tax benefit totaled $151.7 million or $1.78 per diluted share, representing strong cash generation that supports our capital allocation strategy that Dave mentioned earlier. In the fourth quarter, we repurchased 814,000 shares under our repurchase plans, deploying $51.6 million at an average price of approximately $63 per share. At year-end, we had more than $300 million in remaining capacity under our current $500 million authorization. In total, we returned $93 million to shareholders in the fourth quarter through a combination of share repurchases and dividends. For the full year 2025, we returned $366 million to shareholders, underscoring the cash-generative nature of our business and our commitment to delivering shareholder value. The Board declared our regular quarterly cash dividend of $0.49 per share, which will be paid on March 25 to shareholders of record at the close of business on March 10. Our net leverage ratio was 1.0x as we end the quarter with $164 million in cash on the balance sheet, and our revolver remains undrawn. Total client assets reached $316.6 billion, as you can see on Slide 14. This is up from $176.1 billion at the beginning of 2025, an increase of $140.5 billion or 80% for the year. On an average AUM basis, fourth quarter average AUM rose 3.1% to $312.9 billion. For the full year 2025, average AUM was $268.8 billion, reflecting the end of the first quarter closing of the Pioneer acquisition. The composition of our AUM reflects a well-diversified platform across asset classes, distribution channels, investment vehicles and geographies. On Slide 15, we show the gross and net flows of our long-term AUM. Long-term gross sales reached an all-time high of $17.1 billion in the fourth quarter, up slightly from the third quarter. This marked the sixth consecutive quarter of higher gross sales. Year-over-year, gross sales increased by 159% from $6.6 billion in the final quarter of 2024. At an annualized run rate of approximately $68 billion or 22% of long-term AUM, we believe gross sales are sufficient to drive positive organic growth over the longer term. Long-term net outflows were $2.1 billion in the fourth quarter compared to $244 million in Q3. Q4 was an off-trend quarter from a net flow perspective, as Dave explained earlier in the presentation. We did realize strong underlying positive net flows in key growth areas in the fourth quarter, including Pioneer's multi-asset and fixed income strategies, validating the strength of the Pioneer franchise and our integration efforts. Our international channel was also net flow positive, and there is substantial runway ahead as Victory products become more widely available in new geographies and in packaging suited for sales outside of the U.S. Our VictoryShares ETFs had net inflows along with multiple other franchises in 2025. Our one but not yet funded book remains strong, spanning across numerous franchises and distribution channels. We expect this to help us in the first half of 2026 as most mandates will fund during this time frame. Looking ahead, we remain confident in achieving consistent positive net flows as we now have the product set, the distribution reach and the investment performance to support this. As illustrated on Slide 16, revenue for the fourth quarter was $374.1 million, up $12.9 million or 3.6% sequentially from $361.2 million in the third quarter. Our revenue realization rate was 47.4 basis points in the fourth quarter. This is at the high end of our guidance range of 46 to 47 basis points and reflects the favorable product mix we are seeing across our diversified platform. For the full year 2025, total revenue surpassed the $1 billion mark at $1.3 billion, a substantial increase from the previous year. The stability of our revenue realization rate is noteworthy. Despite significant changes to our AUM composition throughout the year, including the Pioneer acquisition, VictoryShares nearly doubling in size and various franchise rationalizations, we have maintained revenue realization within a tight range. This speaks to the quality and diversification of our product mix. For 2026, we expect our revenue realization rate to remain consistent within our 46 to 47 basis point guidance. On Slide 17, you can see total GAAP operating expenses of $221 million were essentially flat with $223 million in the third quarter. The decrease in operating expenses was due to lower acquisition, restructuring and integration costs, which peaked in the second quarter and should continue to decline in future periods as we complete the final stages of the Pioneer integration. This was partially offset by slightly higher compensation expenses, which are correlated to revenue and earnings. Including nonoperating expenses, total expenses of $232.5 million were in line with the prior quarter's $231.9 million. Our GAAP tax rate was 20.4% in the fourth quarter, below our long-term guidance of 24% to 25% because of onetime state tax apportionment adjustments related to the pro forma business incorporating the Pioneer Investments business. While we see no material changes to our long-term guidance for taxes, this did have a few cents positive impact on our ANI EPS in the fourth quarter. Our expense discipline is reflected in our industry-leading margins. Looking at the expense trajectory throughout 2025, we've shown consistent progress on integration and net expense synergy realization while continuing to make investments to drive future growth. Turning to our non-GAAP results on Slide 18. You can see the upward trajectory of our business over the past 4 quarters. This chart illustrates consistent profitable growth in both adjusted net income and earnings per diluted share with tax benefit, demonstrating the quality and sustainability of our earnings. The sharp year-over-year growth metrics detailed in the sidebar tell an important story. Our ability to drive earnings and cash flow expansion. This is the power of our strategic M&A model at work. We're actively building a more valuable and profitable platform. We believe our track record of consistently achieving stepwise growth through strategic acquisitions remains significantly underappreciated by the market. We have demonstrated a repeatable playbook for identifying, acquiring, integrating and creating shareholder value from transformational transactions. The Pioneer acquisition is the latest proof point. We are ahead of schedule on net expense synergies. And at the same time, we nearly doubled the size of our VictoryShares platform. Enhanced our organic profile with additional high-performing products and access to new clients, and we are generating industry-leading margins while simultaneously investing for growth. These results, just 9 months post the closing have exceeded our original accretion estimates of low double digits. This is not just about one successful deal. It's about a proven inorganic growth strategy that creates compounding value over time. Turning to capital management on Slide 19. We continue to be disciplined stewards of our shareholder capital. At the end of the third quarter, we combined our original term loans into a single credit facility of $985 million. This new consolidated Term Loan B has a 7-year term, effectively pushing out our debt maturity to 2032, eliminating any near-term refinancing risk and simplified our capital structure. This provides us with significant strategic flexibility, and we also lowered our borrowing costs. The new facility is priced at SOFR plus 200 basis points, which represents a 35 basis point reduction from our pre-refinancing rate. This improvement translates to approximately $3.5 million in annual interest savings, a meaningful reduction that flows directly to our bottom line. At the same time, we extended our $100 million revolving credit facility for an additional 5 years. The revolver, which remains undrawn, now matures in 2030 and provides us with additional liquidity and financial flexibility. At year-end, our leverage position was very strong and supportive of our inorganic growth strategy. Our Term Loan B balance stood at $982.5 million, down $2.5 million from the refinancing. Combined with $164 million in cash on the balance sheet and our undrawn $100 million revolver, we have substantial liquidity and a net leverage ratio of 1x. With that, I will turn the call back to the operator for questions.

[Operator Instructions] Your first question comes from the line of Craig Siegenthaler with Bank of America.

This is Ivory on for Craig. As legacy Victory strategies begin to be registered into UCITS vehicles and distributed through Amundi's global network in 2026, what should we expect in terms of UCITS product additions and platform approvals? And how quickly could these contribute to an improvement in non-U.S. flows?

I'd first start off to say that we did highlight in the script that we had launched a few new UCITS, I think, 5 of them. 3 of them were kind of legacy Victory and 2 of them were Pioneer. And so we've already started on that journey of launching products into the system. We plan to launch more in 2026. And the impact of the new launches will probably take effect as we move through the year and more towards the end of the year. There are a lot of products today that are in the system that are selling. We did highlight that outside the U.S., we have been net flow positive since we closed the acquisition in April, and we're pretty excited about the international distribution channel. But I'd say over -- not just '26, but over the years to come, we'll be launching a lot more product into the system.

And for a follow-up, as you evaluate a pipeline that stands well above and below the $50 billion to $200 billion target range, what characteristics would make a larger deal actionable for you in the near term versus one you prefer to defer?

I think when we think of acquisitions, we look at what's available, and we also look -- we start off with the concept of does it make our company better? Does it enhance our platform from a distribution perspective, from a product perspective, from a size and scale perspective. And so we look at all of those characteristics. And if it fits well, all of those, we'll execute on it. I don't think that we're in the position to want to defer an acquisition or not. I think it's kind of what's in front of us and what's available and does it fit the things that we're thinking about that betters our company.

Your next question comes from the line of Benjamin Budish with Barclays.

Maybe just following up on the M&A discussion. It sounded like after the Amundi transaction, you guys were quite operationally ready to do something again. I think in the prepared comments, you talked about sort of sticking with your historical cadence, but you're also -- do you see more opportunities, you're going to be very aggressive here. Just curious how should we be thinking about the potential cadence of M&A? Could things be happening more frequently given the -- what you see as an urgency kind of building across the industry and your own sort of appetite? Or is Amundi a little bit different since it's not -- it's a different type of acquisition and a kind of traditional straightforward transaction would require more internal integration. So just curious how we should think about that cadence going forward?

I'd start off to say that we are almost complete with the integration of Amundi/Pioneer Investments. And you can see that through the progression of the net expense synergies almost getting to the complete target that we have out there. And so we're very comfortable with where we sit today that we are ready to do an acquisition. And I think from there, we highlighted that a larger sized acquisition makes a lot of sense for us for a lot of the reasons we've articulated over the last few years with what's happening in the industry. And the cadence, we have been very active. If you go back to when we did our management buyout in 2013 and even when you look at when we did our IPO in 2018, we have averaged an acquisition every 1.5 years is really what the cadence is. And I don't think there's any reason to think that, that's going to change. It could be a little bit faster, it could be a little bit slower. But when you look at it over a longer period of time, I think that's a good cadence. Of course, there are lots of external factors that impact that. But what I would leave you with is that we are ready to do an acquisition. We're very busy. I think there's a lot of great opportunities out there that would make our company a lot better and also would allow us to create a lot of shareholder value. And I would -- last thing I would say is our balance sheet is ready as well as we've brought down our leverage to the lowest it's been since we've been a public company.

Understood. Very helpful. Maybe just a follow-up. You've been talking about the build-out of Victory's sales force in addition to sort of the preparation being done with the Amundi sales force. Can you maybe talk about where you are in that process? How much more hiring needs to be done or training? Obviously, you sound like you're very confident on the near-term outlook, but just what else is required to be done internally? Or is it sort of -- in addition to those synergies, the pieces are in place and it's sort of a matter of time before your confidence in the inflow outlook starts to come to fruition?

So we're about 10 months in since we've closed the acquisition. We are done with the hiring and the integration. The teams are set and the training is happening. I would say that really in all of our distribution channels, I think our team is trained well. I think they understand the products. I think it's getting out in the field and educating clients and platforms inside the U.S. and outside the U.S. about our different products. So we're well into the journey. I think as we look out in '26, we think that a lot of the investments we've made from a training, from a marketing, from a partnership perspective are going to pay us back in 2026. So I think a lot of the hard work has been done, and now we're really ready to reap the benefits of it.

[Operator Instructions] Your next question comes from the line of Michael Cho with JPMorgan.

I just wanted to touch on the commentary, Dave, you made about the ETFs and the various intermediary partnership. I was hoping you could flesh out some of the comments you made earlier and maybe the benefits you see these partnerships providing Victory, including any market share dynamics that you've observed, and really how that's relative or how that's evolved relative to the traditional mutual fund side?

Michael. So let me start off and say that our ETF platform, VictoryShares, I think, is quite unique. It averages about 34 basis points across the platform, and we have 23 ETFs. And we have, over the last few years, really invested into the distribution platforms through partnerships, through partnering on marketing and education and a lot of other areas where we think we're adding value to the platforms and also to the advisers. And so with those investments, we're seeing a lot of great results. And I think as time goes on, we're going to do more of them. And I think those types of partnerships are going to be super important for the future, and I think they're going to be table stakes to be able to be competitive in selling and servicing ETFs. We're seeing more opportunities. A lot more of the platforms have come up with different kinds of partnerships that are unique to their own platforms. The ones that we like are ones that have more of a selection perspective as opposed to partnering with everybody, and those are the areas that we're investing that have more of a limited set of managers they're partnering with. But I see it as a big part of the future. They are similar to mutual fund platform partnerships. They are not so different, but there are some unique characteristics from an ETF perspective.

Great. I appreciate all that color. I guess if I could just follow up just along the same topic with more partnerships, more selective and more nuances to come. Now how would we think about maybe an extension of these types of partnerships, maybe as it relates to private markets, right? I mean does that give Victory an edge when thinking about shelf space for any prospective private markets partners that may be out there?

I think it does. If you have a partnership or you're close with a platform, I think it makes it a lot easier to introduce new products, be it private market products or other types of products. We have seen that over the years as we've come into partnerships, as we've built relationships with the platforms and the home offices and a lot of the advisers, it's much easier to introduce new products off of an existing relationship and partnership. And so as we evolve our business and I think as the industry evolves to buying different types of products, again, private markets and other products, I think these partnerships and these relationships are super valuable to us. And I think it just gives comfort to the platforms of who they're doing business with, how we do business, how we service. And I think there's a real long-term relationship opportunity that you can maximize as you develop new products.