Shares of Eaton Vance Corp. (EV) have lost over 5% since the company released its fiscal first-quarter 2015 (ended Jan 31) results on Wednesday. Adjusted earnings of 61 cents per share lagged the Consensus Zacks Estimate of 63 cents. However, earnings came in 5% above the prior-year quarter figure.

Investors’ confidence was hurt following the weak results, which reflected pressurized top line and elevated costs. However, growth in assets under management (AUM) and robust inflows remained the strong factors.

Eaton Vance’s net income for the quarter plunged 58% year over year to $32.5 million.

Eaton Vance Corporation - Earnings Surprise | FindTheCompany

Performance in Detail

Total revenue for the quarter amounted to $354.9 million, down 1% year over year. The decline was mainly due to lower investment advisory and administrative fees, distribution and underwriter fees as well as service fees. However, these were partially offset by a rise in other revenues. Further, the figure missed the Zacks Consensus Estimate of $368.0 million.

Total expenses climbed 29% year over year to $304.4 million. The rise was triggered by a substantial increase in distribution expense along with an increase in fund-related expenses as well as compensation and related costs. However, these were partly mitigated by a reduction in amortization of deferred sales commissions, service fee expense and other expenses.

Total operating income dropped 59% year over year to $50.6 million.

As of Jan 31, 2015, Eaton Vance had $247.3 million in cash and cash investments compared with $385.2 million as of Oct 31, 2014. Further, the company had no borrowings outstanding against its new $300 million credit facility.

Assets Under Management

Eaton Vance’s consolidated AUM grew 6% year over year to $295.7 billion, reflecting net inflows of $5.2 billion and market appreciation of $11.9 billion.

As of Jan 31, 2015, long-term fund AUM summed $129.6 billion, down 2% year over year. Moreover, institutional AUM came in at $107.5 billion, reflecting a 13% increase from the year-ago quarter. Further, high net worth AUM grew 17% year over year to $22.6 billion while retail AUM totaled $36.0 billion, up 12% from the prior-year quarter.

Share Repurchase

Eaton Vance repurchased nearly 1.5 million shares of its Non-Voting Common Stock during the quarter for $59.7 million under its existing repurchase authorization. The company has a share repurchase authorization of 8.0 million, out of which around 3.2 million shares remain to be repurchased.

Our Take

Eaton Vance’s current earnings results were overshadowed by higher costs. However, the elevated distribution expenses during the quarter included a lump sum payment to end the service relationship with a major distribution partner. According to the company, the end of the deal will result in a reduction of annual distribution expense by around 7 cents per share going forward.

Moreover, the company’s NextShares initiative contributed to the escalating costs. Though the initiative increased expenses in the near term, the launch of NextShares funds will likely benefit the company in the long run. Also, the rising need for risk management and alternative investment solutions within the financial service industry are expected to further strengthen the company’s financials.

Eaton Vance currently carries a Zacks Rank #3 (Hold).

Performance of Other Asset Managers

Among other investment management firms, Invesco Ltd. (IVZ), Affiliated Managers Group Inc. (AMG) and Ameriprise Financial Inc. (AMP) outpaced the Zacks Consensus Estimate in their latest earnings releases. Their results were driven by revenue growth, partially offset by elevated expenses. Further, all three firms have recorded impressive AUM growth.

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