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Has Focus Financial Vindicated Itself?

The RIA roll-up firm announced strong quarterly results and said it plans to pay down debt next year while promising that growth won’t suffer.

Analysts raised serious questions about Focus Financial’s heightened leverage earlier this year but the serial acquirer of RIAs put many worries to rest Thursday as third quarter results and its earnings presentation wowed investors.

The acquisition of three new partner firms, which Focus takes an equity stake in, increased Focus Financial’s leverage ratio to 4.3-times in the third quarter. But the company doesn’t believe the risk profile of the business increased with it, Rudy Adolf, Focus Financial Partners’ founder, CEO and chairman, said.

Adolf gave glowing praise to the new RIA partners. They were already growing before his firm acquired them with the intention to inject capital and other supporting services. 

Focus Financial estimates the three RIAs – Williams, Jones & Associates, Escala Partners, and Altman, Greenfield & Selvaggi or AGS – will bring with them over $90 million of incremental annual revenue and $29.4 million in annual adjusted Ebitda (earnings before interest, taxes, depreciation, and amortization). That cash flow gives the company “excellent downside protection,” Adolf said.

“I would make the same decision again and again.”

Still, Focus Financial is approaching the high end of its desired 3.5 to 4.5-times range and plans to pay down debt in 2020. 

It was also a reminder that analysts and investors can be hard to please. “Is there any level that you guys are uncomfortable at?” Michael Carrier, an analyst at Bank of America’s Merrill Lynch, asked about the leverage ratio after the second quarter. But after Thursday’s presentation, analysts were wondering what impact deleveraging the company would have on revenue growth. 

Focus Financial reaffirmed its annual revenue and adjusted net income per share growth targets of 20%, on average, over time.

Shares of Focus Financial (ticker: FOCS) were 11% higher to $26.39 Thursday afternoon yet remain well below a high of $49.25 reached last fall. The company went public last July.

Focus Financial’s total revenue rose 34.4% year-over-year to $316.6 million. The firm estimates that 73% of its total revenue is correlated to financial markets. Nearly all revenues (95%) are fee-based and recurring.

After posting a loss of $41 million in 2018, it has been modestly profitable this year. It reported net income of $247,000 through June 30 and $400,000 in the third quarter.

It reported non-GAAP net income of $45.6 million, up 33.7% from a year earlier. Adjusted net income per share increased 34.8% to $0.62.

Focus Financial now has a total of 63 partner firms which completed 28 deals of their own so far this year. In terms of transactions, 2019 has been the busiest in the company’s 15-year history. At 34 deals, including those with new partner firms, total volume for the year is already 36% more than all of 2018.

Among the three partner firms acquired in the third quarter, Escala Partners was the only one outside the U.S. The wealth manager with more than $3 billion is based in Australia, one of the international markets where Focus Financial sees opportunity to expand further. 

“We see these international markets, and really Australia and Canada first and foremost, as very attractive growth diversifiers for us in many years to come,” Adolf said. 

He assured listeners on Thursday’s call that Focus Financial would remain a business aimed at the U.S. where it is differentiated. But there is opportunity beyond where a company like Focus Financial “in so many ways, in these markets, it’s almost unheard of.”

The five International partners from Canada, Australia and the U.K. contribute $14.1 million or 4.4% of the company’s total revenue.

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