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A Market Collapse Didn’t Blow Up Focus Financial — It Grew in the Second Quarter

Will the company’s performance in 2020 silence critics for good?

In the past, skeptics have questioned Focus Financial Partners’ business model, research analysts have raised concerns about its leverage ratio, and the serial acquirer of RIAs had at least one outspoken short seller

On Thursday, the consolidator might have silenced those critics for good, or at least for some time.

In May, after considering the impact of the Covid-19 pandemic on markets, economies, and its own business, Focus Financial adjusted its guidance for the year. But it beat those expectations in the second quarter and gave new guidance for the second half of the year.

"Our 2020 second quarter results exceeded the high end of our expectations and are a powerful affirmation of the resiliency of our business. Our business is weathering the volatile markets well,” Rudy Adolf, the founder, chairman, and CEO of Focus Financial, said Thursday morning during its second quarter earnings presentation.

Focus Financial reported net income of $3.3 million in the second quarter, up 7.3% year-over-year. The majority of this growth was the result of new partner firms added, which Focus Financial provides supporting services to and helps to acquire other RIAs of their own. The company reported net income of $34 million in the first quarter and a loss of $12.7 million in the fourth quarter last year. It was modestly profitable in 2019.

Organic growth for the quarter was flat in the second quarter, a much better result than the expected 5% to 7% percent decrease.

Total revenue was $313.1 million, up 3.8% compared to the second quarter last year, and higher than the estimated $290 to $310 million range. Non-GAAP or adjusted net income in the quarter was $54.3 million, up 31.7% year over year, and adjusted net income per share increased 29.1% to $0.71 year over year. Fee-based, recurring revenue generated from its minority ownership in the partner firms accounts for over 95% of Focus Financial total revenue.

The company’s net leverage ratio, which analysts raised questions about last year, was 3.85-times, within its target range of 3.5- to 4.5-times. It also has an unusual amount of cash from operating activities during the trailing fiscal year that ended June 30: $203.9 million, 64.5% more than the same prior period.

In response to the quarterly report, shares of Focus Financial (FOCS) rose 2% on Thursday. In early Friday trading, shares rose further to an intraday 52-week high of $40.94 before dipping to a recent $39.

"Our second quarter results were a testament to the strength of our business. We needed a market crisis to demonstrate the performance of our model under pressure,” Jim Shanahan, chief financial officer at Focus Financial, said Thursday. 

“Although Covid-19 uncertainty persisted throughout the quarter, our partner firms continued to deliver excellent service to their clients and manage their businesses well, while simultaneously positioning themselves for future growth. We believe the opportunity set post-crisis will be substantial."

The pandemic slowed deal activity in the second quarter, as advisors adapted to working remotely and focused on tending to clients and portfolios. Focus Financial has done eight deals — “a relatively small number” — so far in 2020; it’s added two partner firms and partners have acquired six others. 

But merger and acquisition talks have restarted and Focus Financial and its partner firms hasve a pipeline of potential deals, and some which have yet to be announced. Deal volume will surge in 2020, but in the past, RIAs have achieved impressive organic and inorganic growth in the year or two following a crisis, Adolf said.

“We are seeing already, and hearing from our partners that their referral numbers are very good. I have to say, when I’m out there with the partners, I really like what I’m seeing,” he said.

The deals in the pipeline for 2020 are smaller relative to some it’s done in the past but Adolf said his company has never played in the “mega deal” space.

“We’ve seen a couple more unusual transactions. Quite frankly we were stunned by what the multiples were, meaning what they must have paid. It’s more international and sometimes private equity-supported players that seem to be way out of sync with industry multiples,” Adolf said.

Those companies are missing out on the best returns generated by the medium-sized RIAs, the ones Focus Financial is interested in, he added. “We will remain disciplined on the multiples.”

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