Third Quarter 2026 Earnings Conference Call - VICTORY CAPITAL HOLDINGS INC

Financial Performance:

• Total client assets reached a record $355.5 billion, up 3% QoQ and 13% YoY.
• Revenue was $396.6 million, up 10% YoY, representing the second-highest quarterly revenue in company history.
• Adjusted EBITDA was $212.1 million (up 11% YoY) with a margin of 53.5%, exceeding long-term guidance of 50% by 80 basis points.
• Adjusted EPS was $1.98, up 21% YoY, driven by strong organic growth and operational efficiency.
• Net leverage ratio remained low at 0.9x, with $208 million in cash and a fully undrawn $100 million revolver.
• Free cash flow was robust, enabling $81 million in shareholder returns for the quarter ($39.3 million in share repurchases and a $0.50 per share dividend).
• Average fee rate for the quarter was 44.8 bps, with year-to-date rate at 46.3 bps, staying within the 46-47 bps annual guidance range.

Guidance and Future Outlook:

• Full-year 2026 adjusted EBITDA margin guidance remains at 50%, a target met or exceeded for 14 consecutive quarters.
• Full-year 2026 average fee rate guidance reiterated at 46-47 basis points; projected to rise to the low-to-mid 50s post-First Eagle close.
• The company targets a $1 trillion AUM long-term goal, having grown AUM by over 3,000% since its 2013 management buyout.
• Q4 2026 flows are expected to sustain the strong momentum seen in Q3, with a significant "one but not yet funded" pipeline across fixed income, multi-asset, and solutions expected to close in Q4 and Q1 2027.
• Long-term gross flows of $30.5 billion (annualized ~36% of long-term AUM) are viewed as sufficient to drive sustainable organic growth.

Business Segments and Product Lines:

• VictoryShares ETF Platform: Delivered record performance with $27.7 billion AUM (+61% YoY) and $3.9 billion in net inflows (+67% annualized organic growth); launched two new municipal ETFs to bring the platform to 25 funds across 7 themes.
• Fixed Income: Significant growth driven by Victory Income Investors, Pioneer Investments, and institutional separate accounts; flows are broad-based rather than concentrated in a single vehicle.
• Solutions: Multi-asset and solutions products saw strong momentum, partially driven by the VictoryShares ETF platform.
• International Business: AUM reached $65.8 billion across 62 countries; up 46% since the Pioneer acquisition closed 18 months ago; growth led by Asia, Europe, and emerging Middle East regions.
• Asset Mix: Solutions represent 33% of total AUM, U.S. equity 29%, fixed income 25%, and global/non-U.S. equity 11%, reflecting a deliberate shift from the 80% U.S. equity mix in 2013.

Market and Competitive Landscape:

• Investment Performance: 56% of rated mutual funds and ETFs hold 4- or 5-star Morningstar ratings (vs. ~33% industry-wide), representing 62% of rated AUM.
• Benchmark Outperformance: 60% of AUM outperformed benchmarks over one year, 69% over three years, 63% over five years, and 77% over ten years.
• Amundi Partnership: International growth is accelerating as the distribution partnership deepens, with 24 sub-advised funds in use and a pipeline of U.S.-listed ETFs expanding into Asia and Latin America.
• Industry Trend: Client allocation is shifting toward fixed income, multi-asset solutions, and ETFs; Victory's diversified product lineup is positioned to capture this demand.

Risks and Challenges:

• Acquisition Risks: While management asserts no flow dissynergies are expected based on past integration success (e.g., Pioneer), risks of client attrition or product overlap are standard in large mergers.
• Integration Execution: Closing the First Eagle acquisition is contingent on customary conditions and a stockholder vote scheduled for November 17, 2026; expected to close by end of Q1 2027.
• Fee Rate Volatility: Quarterly fee rates fluctuate due to the timing of annual performance-based fees, which are recognized unevenly throughout the year.
• Market Dependency: Organic growth relies on sustained strong investment performance and continued client confidence in the broad product lineup.

Management Commentary and Tone:

• Tone: Management expressed high confidence and excitement, characterizing Q3 as a "convergence point" where years of investment in distribution, technology, and product development are maturing.
• Strategic Vision: CEO David Brown emphasized that growth is broad-based across all channels and asset classes, not reliant on a single franchise or vehicle.
• Integration Confidence: The company highlighted a proven track record of eight successful acquisitions since 2013, viewing the First Eagle deal as a "transformational" step toward the $1 trillion goal.
• Capital Allocation: Stated commitment to strategic acquisitions as the primary use of capital, alongside returning capital to shareholders via buybacks and dividends.

Analyst Questions and Answers:

• First Eagle Flow Dissynergies: Management confirmed zero expected flow dissynergies, citing the stability of First Eagle's positive flows and their plan to integrate sales teams immediately post-close; accretion assumptions exclude any potential revenue synergies, relying on conservative single-digit organic growth.
• Talent Retention: Key investment teams at First Eagle will be placed on a revenue-share model identical to existing franchises, designed to retain talent and align incentives with AUM growth.
• Fixed Income & Solutions Momentum: Flow strength in fixed income and solutions is broad-based across multiple franchises and channels, with momentum continuing into Q4 and a significant pipeline to fund in Q4/Q1.
• Fee Rate Outlook: Q4 fee rates are expected to see a modest uptick due to the absence of the large Q2 annual fee catch-up; full-year guidance remains 46-47 bps, rising post-First Eagle closure.
• International Growth: International growth is driven by legacy Victory products entering the Amundi distribution system and strong demand in Asia/Europe; the partnership is expected to grow faster than the domestic business in 2027.
• Pipeline Composition: The "one but not yet funded" pipeline is broad-based across channels (intermediary, institutional, international) and asset classes, reflecting the Q3 flow strength.

Other Key Points:

• First Eagle Acquisition Details: Adds $222 billion in AUM (92% rated 4-5 stars) to the combined platform; creates a more diversified, resilient business with complementary global value capabilities.
• Synergies: On track for $280 million in net expense synergies; the transaction is expected to provide 35% accretion to 2027 adjusted EPS.
• Upcoming Milestones: Special stockholder meeting scheduled for November 17, 2026; October monthly AUM data to be released on November 11.
• Expense Structure: Over two-thirds of operating expenses are variable; cash compensation remains in the 21.7% range, consistent with expectations.
• Historical Context: Adjusted EPS has grown at a 21% CAGR since the 2013 management buyout, with a 400% increase since IPO.